Saturday, January 03, 2009

Government Failure #379

I fail to understand why the Ministry of Communication and Information forbids inter network free SMS -- the name of the Ministry already sounds like an Orwellian bad dream, by the way.

They think it violates fair competition because the benefit goes to large providers as consumers switch to them and use more minutes calls for more free SMS.In other words, they blame the big providers because they are, well, big.



  1. Rizal:
    It's called network externalities. It provides undue advantage for larger firms with wider coverage.

    It surely is anticompetitive, because it can be used as an instrument for predatory pricing to block entry, even when the (large) incumbent firm never actually implemented it (i.e., even if the consumers never enjoy the free sms). So, not a government failure here.

  2. Arya, thanks. Suppose I am an efficient provider who was willing to take a risk to enter the market when no one was, and the consumers like me, and by that I get bigger and secure wider coverage --hence network externalities.

    Am I playing unfair competition when I try to make profit out of my investment?

    Am I missing something here? Suggestions are welcome.

  3. Rizal:

    On the fairness issue: If the initial market share was not obtained fairly (say, through crony-ism), is it fair to perpetuate this initial unfairness by allowing current incumbents to block future entry?

    But more importantly, from the economist's point of view, allowing firms to exploit network externalities unfettered will stifle innovation and have serious efficiency costs. Indeed, this is the reason why we want to have anti-trust regulations in the first place.

  4. I have really found your post to be informative and this has compelled me to visit your blog over and over again. I'd like to thank you for your efforts in spreading academic information. Regards.

  5. rizal, network externalities are not about getting bigger per se.

    we have network externalities if the utility of the product depends on the units sold. in other words, the value of the product increases as its market size increases.

    classic examples of products with network externalities are fax machines, telephones, video conferencing, or maybe even "social networking" sites. they are useless if i'm the only person who use it, but it's value increases as more people use them.

    as arya mentioned, this can be highly inefficient; especially if we have complementarities combined and resulted in increasing return.
    people use the product not because it's the most efficient product but simply because most other people use it.

    ~polite sociologist @ NYC

  6. ps@nyc, thanks. Your point on network externalities is well noted. Another classic example would be Microsoft software.

    But I am still uneasy on why it is necessarily inefficient. Getting bigger, of course, means bigger network. For instance, one reason that I buy BMW, not some Russian cars, because I know I can rely on their network of repair shops. And higher number of repair shops is surely because there are lots more BMW than Russian cars.

    (note: I don't have BMW)

    If then, because of economies of scale, BMW somehow can squeeze the price down below the Russian cars' --or make the first 25K miles repair free --, what justifies the government to ban BMW to do so?

    I think the only thing that could qualify for unfair competition, thus justify anti-trust law, is when there is a deliberate attempt by the government to discriminate market players.

  7. Rizal:

    First, I'd like to retract my previous statement. I shouldn't have said "not a government failure here". I should have said "not an obvious government failure here".

    In fact, I agree that this policy is misconstrued -- but not because it's "[blaming] the big providers for... being big". If the government wants to defend its policy, it may try to argue that it does this to prevent incumbents using its dominant position to exploit prices.

    However, my problem is that this policy simplistically assumes that: (i) a zero price implies predatory pricing; and (ii) a zero SMS price is the only way for firms to exploit price using its dominant position. I imagine there's a range of nonzero prices at which firms can exploit their dominant position -- hence, the policy is hardly effective. The policy appears to be ad hoc (and may have even been driven by incumbents' attempt to block entry from new players).

    If the concern is truly about predatory pricing, the government needs to figure out a way to detect predatory pricing. Apparently, this is not an easy task, but I agree that his policy ain't it.

    On reasons for anti-trust actions, I am no expert on this. But I think there may be other reasons, such as bundling, where anti-trust actions are justified.

  8. all your discussions too complicated but far away from real problem in the field.

    Thats just like new economist who inteds to talk with book in your head.

    Try to put your head at minister position, and you will know the problems will not as simple as you draw in your paper.

    some political matrixs must be included in your drawing.

    Try to remember, run the government is not like you teach school boy in their first second year university...

    Good luck with your knowledge journey.

  9. Anonymous, of course. The latter is apparently harder :D