Eliminating barriers to competition—the overlooked remedy for high cellphone bills
The cost of cellphone services always seems like a hot topic in Canada. This past election season, the parties floated ways to bring down prices for Canadian consumers.
But first, it’s necessary to cool down the temperature a little. To justify many of their positions, the different parties depicted Canada as the “last of the pack” among rich countries for a large array of telecommunications concerns. Prices, they said, are among the highest while measures of quality are among the lowest. Canadians, they said, are getting a raw deal.
However, the reality is somewhat different. While clearly not a leader, Canada tends to be close to the average of OECD countries (or slightly above average) in quality of service (downloading speed, connection speed, etc.). Prices are high relative to other countries but they are relatively stable and there’s a growing number of Canadians who consume broader quantities of mobile services. Overall, Canada is not a stellar performer but is nowhere near as bad as we often hear.
But this exposition of facts should not diminish the one important policy course that could improve the quality of service for Canadians while bringing down prices—removing foreign investment restrictions in telecoms.
According to federal legislation, all firms with more than a 10 per cent market share cannot have more than 20 per cent of the voting shares owned by non-Canadians. In effect, this restricts the ability of foreigners to invest in expanding mobile services to Canada. While the rules were relaxed in the last decade (the restrictions against foreign ownership used to be even stricter than they are now), barriers remain high enough to prevent entry by American firms. The OECD makes this abundantly clear when it notes that Canada has the second-highest levels of barrier to entry into the telecoms industry of all member countries.
In essence, rules against foreign ownership are barriers to entry. And economists warn consistently against barriers to entry. Competition is not always, as is commonly believed, determined by the number of firms in a given market. It’s determined by whether or not incumbents can be threatened and challenged by new entrants if consumers express discontent.
If that threat is present, incumbent firms (even if there’s only one firm) must be on their toes constantly. If they keep prices high, they incite players to contest them. If they don’t increase quality to meet consumer demands, they incite new players to challenge them. Not knowing where the threat may come from, firms feel the need to constantly improve to deter entrants from exploiting weaknesses.
However, if one removes that threat of entry, one destroys a powerful incentive to improve the quality and reduce prices for consumers. The restrictions on foreign firms entering the Canadian market for mobile services destroys the incentive. Consequently, the removal of this policy would address the problems said to be plague the Canadian telecoms market.
This policy proposal, which is quite easy to adopt, does not appear on the radar of public discourse. That’s a shame for Canadians and our cell bills.