Telecom has always been Expensive, But Why?

14 Apr

Cable internet and phone prices have been high for the longest time, much like Snoop Dogg.

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“You comfy back dere Bell? Rogers? Telus? We about to go higher than I’ve ever been. Man you guys crazy.”

Our favourite, well actually our only, telecom companies, Bell, Rogers and TELUS make up the oligopoly that is our major market of communication and entertainment. We have tolerated their high prices for so long that it has become natural to us. The prices keep increasing every year, and yet it seems not much can be done. Why are we paying among the highest prices for the lowest quality service?Well, let’s buckle up and try to explain why this is.

Oligopoly

0/10 would not play
0/10 would not play

Our current Market for cable and phone companies is an oligopoly. An oligopoly is when two or more companies have a majority of control over the markets. This is certainly true, as Rogers Bell and TELUS control 94% of the wireless telecommunications industry as of 2008, and not much has changed since then. This year Vidéotron won 7 licenses in the 700 MHz spectrum auction, making it a small, 4th competitor in the market. Only time will tell how this will affect consumers, but for now there is no visible change. The problem with Oligopolies is that they tend towards collusion, the general agreement between companies to fix prices at a certain range. This results in an overall higher price that Canadians have to pay for their telecom services. Only the other month, Bell Rogers and Telus did this exact thing, providing me with a very convenient example. The big three, Bell, Rogers and Telus all raised their prices for most of their cellular plans by 5 dollars. This tells us all about the collusion game they have going on. Definitely most of us will be angry about it and then forget about it, as we are prone to do. Only because we are clueless as to what to do. It’s sad that we can be taken advantage of like this. The agreement of price keep prices high no matter who were turn to, we are cornered.

Supply and Demand

Now we need to look at first the legitimate and fair reasons why the Big Three can decide to charge us their high prices, and then the unfair reasons. Although the product provided by the big three is a service, it is finite in that the companies have to supply the people with it using resources. Equipment such as servers routers, internet hubs all cost the companies a significant amount of money due to the people they have to serve. Not only that, they also have to provide maintenance on their systems dn repairs on customers systems. These are requirements to provide service, it is absolutely essential, and is a reasons why we pay high prices. For effective service and customer service a certain price must be paid. Everyone understands this, but it is important.  Rogers, (I’m not singling them out mind you), they have consistently made a profit of 1.1 billion after taxes every year. They make so much money that they were able to outbid Bell and TELUS for some of the prime spots of 700MHz spectrum in theaforementioned auction at a 3.3 billion dollar price tag this year. For a company to spend so much and still be able to operate without problems is a clear indicator that maybe that maintenance stuff doesn’t cost that much after all. Telecom companies often create what can be described as artificial supply and demand in order to make the consumer pay more. Take for example the charges one pays for overage on internet usage. First off, internet usage is not anything extremely taxing on the servers. Companies pay for what they need with their bandwidth and distribute it. The per gigabyte charges on home and mobile internet has cost some of us to pay from a few dollars extra to double the monthly bill. I mean you’d think it’d be reasonable charges right, considering how much they have to pay for bandwidth and maintenance. You’d be wrong. When we are charged $2 per gigabyte over the limit, we are paying an absurd 3,900% more than any of the companies are paying for their bandwidth. It costs them 5 cents to transmit it. And often we are charged more than 2 dollars per gigabyte over. So a clear answer can be formed right off the bat here. Why are we charged high prices for phone and internet? Because those three villainous highwaymen want to make as much money off of us a possible.
Demand and Supply determinants also affect prices. A claim by a representative of a group of ISP’s in Canada says that upload speeds are slower than most other countries because there is a low demand for providing a service, at around 14% of users using the higher speed service.  However, This does not take into account the effect that the high price has on moving the points on a demand curve. One of the demand determinants is that the higher the price, the less willing the consumer is to buy the product. This is certainly the case for high speed upload rates. If the price was lower, many people would take advantage of the offer, but because of the ludicrous costs it becomes troublesome for the business owners who have to use high speed upload.

Efficiency vs. equity

A very important economic concept is being broken by the high prices of telecom companies. It is the rule of efficiency. For an economy to be called efficient, it must take every opportunity available to make society better off without making others worse off. Bell job cuts and outsourcing. Raising prices makes others have less money in their pocket for their necessities and desires. This makes the consumer worse off. Sure you can say the very presence of those services makes a better life experience to the user, and that would not be wrong. However, the high cost of such a necessary service can create a problematic situation in which necessities may have to be considered as an opportunity cost.

The elasticity of the service

Two factors that apply to elasticity apply to this topic as well. The availability of substitutes is low, and the nature of the item makes the service a necessity. Both of these make the services highly inelastic. Inelasticity is when there is only a small change in quantity demanded when related to a change in price. Everyone needs internet, cable and phones. To live without them in this day and age is to live like a hermit. A price change of $5 overall will no doubt make people angry, but it will not cause a significant amount of people to stop using phones or switch. This is for many reasons, including prison sentence-like multi-year contracts and collusion. This is what I like to call artificial inelasticity.  I mentioned previously that the big three also created their own supply and demand. It is surprising and interesting to discover this while writing this blog post.

Now that we know why the market is the way it is, we can‘t just be satisfied with preaching it to others like a street priest on Dundas. A person with all the knowledge in the world that refuses to act has the same amount of impact on the world as a rock. The only difference is that the person is heavier burden on the Earth. So what can we do to lower the prices, since everyone is so tired of them?

Solutions

Introduce incentives for bringing in new competitors

A moral, economic and social incentive all rolled up into one can be a devastating weapon against corporate collusion. An example of such an incentive is a law put into place preventing the lockout of competitors, or alternatively a law that prevents an extremely large, unnecessary price to be put on the service. It’s economic in that there will be fines, moral in that it’s generally wrong to break the law, and social in that the company who breaks the law will lose reputation with society. Of course, this route is way easier said than done, and even if it were done there are several implications in the job market, cuts and firings that can and cannot be foreseen. This is a negative incentive. On the flip-side positive incentives like tax breaks split across the board that increase based on the number of companies in the market could work. It might not work permanently, but at least it would be enough to get the ball rolling. I do realize that this would be a high cost to the government, and so it would be an unlikely outcome of these debates unless the tax break is small. I do believe that an incentive can work, but only if it is set between the extremes of what I have presented as solutions. If they are executed in a moderate manner the negotiations to lower prices is very likely to succeed.

Becoming less tolerant as a population of high prices and the involvement of media
Perhaps our most effective way to combat the prices imposed on us as a population is to become less complacent and tolerant of them. We need the telecom companies, but they also need us. They are careful not to push us too far, but are testing our boundaries at the same time. To prevent this, we must stay up to date with the situations surrounding our telecom market, and report to our political representatives with any complaints so they can attempt to do something about the overpriced services. Involving the media when there is a large problem and kicking up a fuss will almost always trigger a company response in order to protect their reputation; it also makes them pay attention to the problem at hand. If telecom companies fight us with ads against new competitors, we should use the same media to fight back. If they use media to define patriotism as a close-minded loyalty to all things Canadian, we should portray it the way it is, the betterment and protection of the values of the country by the collective efforts of the people. Their twisted definition does not belong in Canada set of values.

Source: http://econjournals.wordpress.com/2014/04/14/telecom-has-always-been-expensive-but-why/

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