Competition in Colombian Telecommunications

In November 2015, the Colombian think tank Fedesarrollo published its report Update on the Study of Competition in the Mobile Telephony Market in Colombia, which purports to find a lack of competition in Colombian telecommunications. Fedesarrollo’s report also offers policy recommendations to remedy the supposed problems with competition in Colombian telecommunications that it identifies. However, Fedesarrollo’s simplistic empirical analysis is fundamentally flawed and uninformative. Moreover, the policy recommendations that the report’s sponsors—telecommunications operators Telefónica and Tigo—offer in the report and elsewhere would harm Colombia consumers. In this article, I evaluate the market for mobile voice services in Colombia, analyze Telefónica’s and Tigo’s policy recommendations, and critique Fedesarrollo’s empirical analysis.

I conclude that there is no evidence of consumer-welfare loss in Colombian mobile markets. On the contrary, empirical analysis of mobile voice services in Colombia reveals consumer-welfare gains. Moreover, the policies that Telefónica and Tigo recommend—increased asymmetric regulations and restrictions on the offerings of their primary competitor, Claro Colombia—would harm consumers and competition in the markets for mobile voice and data services in Colombia, with a disproportionate share of that harm falling on Colombia’s poorest consumers. Those policies would shield Telefónica and Tigo from competition, which would increase prices in the short run and discourage investment and long-run growth. Telefónica’s and Tigo’s recommendation to delay new spectrum auctions could cost Colombian consumers billions of pesos in lost consumer surplus.

Finally, the Fedesarrollo report’s methodology of computing consumer-welfare loss is seriously flawed and divorced from accepted telecommunications economics. Moreover, the report’s flawed empirical analysis does not support—and in fact bears no relationship to—its policy prescriptions.

In Part I, I analyze the market for mobile voice services in Colombia using competitive benchmark prices. I identify comparable countries on the basis of factors affecting both supply and demand. I econometrically estimate Colombian prices on the basis of prices in those comparable countries and compare those predicted prices with the actual prices of mobile services in Colombia. I find that the actual prices in Colombia were 26 percent lower than predicted prices. Thus, relative to consumers in comparable countries, Colombian consumers benefited from an increase in consumer surplus due to lower mobile prices.

In Part II, I consider the welfare effects of Telefónica’s and Tigo’s policy proposals. The report’s policy proposals find no support in its flawed empirical analysis: the policy and empirical portions of the Fedesarrollo report are completely unrelated to one another. I analyze and explain how the policies that Telefónica and Tigo recommend would harm Colombian consumers, would shield Telefónica and Tigo from competition, and would result in increased prices in the short run and discourage investment and long-run growth.

In Part III, I identify specific errors in the Fedesarrollo report. The report incorrectly uses demand elasticities to estimate changes in quantity demanded, in a way that violates economic theory. The Fedesarrollo report misidentifies the countries that are “comparable” to Colombia, and it then compares the average prices for mobile voice and data services in those countries without considering the differences that would affect prices. The Fedesarrollo report also relies on outdated economic analysis. For example, the report assumes a relationship between market concentration and prices, which is inconsistent with modern theoretical and empirical results. Finally, the report uses data inconsistently and in a manner that misrepresents the state of Colombia’s mobile market.

In Part IV, I offer my own policy recommendations. Unlike Telefónica’s and Tigo’s recommendations, my recommendations are grounded in current economic theory. Ending ineffective asymmetric regulations will encourage investment and long-run growth and will force Telefónica and Tigo to compete more aggressively in the short run. Asymmetric termination rates and restrictions on on-net and off-net pricing differentials shield Telefónica and Tigo from competition. Those regulations discourage competition in the short run and harm long-run growth by discouraging investment. Moreover, Telefónica’s and Tigo’s policy recommendations would disproportionately harm the poorest Colombians. It is time for Colombia to end its failed experiment with asymmetric regulation.

Encouraging infrastructure-based competition, implementing a symmetric regulatory regime, and holding open spectrum auctions without restriction or delay will encourage dynamic competition without any offsetting harm to static competition. Those policy initiatives will ensure that the markets for mobile services in Colombia remain competitive in both the short run and the long run.

Download as PDF