Mark Goldberg


www.mhgoldberg.com





A cost based analysis of Canadian mobile prices

In a recent article in Cartt.ca, economists Mark Meitzen and Nick Crowley of Christensen Associates said “Canadian costs are estimated to be 83% higher than average Benchmark Country costs” for carriers providing mobile services.

“The economic illusion of high wireless prices in Canada” describes the results of their analysis, comparing various factors driving carrier cost differentials in peer nations (United States, Japan, Germany, France, UK, Italy, and Australia). The study was commissioned by TELUS.

The first phase of their work, released last February, measured differences in key mobile cost drivers between Canada and a set of benchmark countries. A newly released report on the second phase of their research determines the aggregate impact of these cost differences on prices.

The economists wrote in Cartt.ca:

As government competition authorities around the world have long recognized, it is simply not possible to draw any meaningful conclusions about the “competitiveness” of markets without benchmarking prices against the underlying costs of providing the services in question.

To do otherwise may serve to fuel populist sentiment, but it does not establish that market forces in Canada are exerting less competitive discipline than those in Benchmark countries.

In fact, our analysis may well suggest that precisely the opposite is true. Because the price differences between Canada and these benchmark countries are presumptively less than the measured cost differences, market forces are actually exerting more competitive discipline in Canada than they are in peer countries to which Canada is compared.

The studies found Canadian costs are about 83% higher than average benchmark country costs, and 34% higher than costs in the US. Assuming 75-80% of costs get passed through, these would translate into Canadian rates having roughly a 2/3 higher price differential compared with the average of the benchmark countries and having about a 1/4 price differential with the US.

According to the authors, “cost differences such as these are an essential consideration.”

The report claims that higher costs mean that mobile wireless prices in Canada could be higher than those found in benchmark countries “without raising concerns that the exercise of market power in Canadian mobile wireless markets is problematic relative to the exercise of market power in peer countries.”

As the authors warn, “Any comparison of prices that fails to take this cost dimension into account cannot be credibly relied upon to inform public policy.”

We all want lower prices for everything, but lower prices can come at a high cost.

In the face of “internet infrastructure… riddled with gaps and bottlenecks,” an article from Bloomberg last week described a shift in thinking emerging from European policy makers, where the prevailing principle had previously been “that more competition leads to better services.”

The Bloomberg article says that European telecom companies are not prepared to fund network investment due to low returns. “So governments are starting to rethink whether consumers are best served by price wars and caps on investment returns that erode the profits companies need to invest in better services.”

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