Let’s wear the shoes of an investor and prepare for the tender of the privatization of the telecommunications monopoly in a given country. Which of the options below will be more attractive for you, thus you will be willing to invest more money?
And why?
a) The company will be sold, including the monopoly rights, and no one will interfere with your pricing later on.
b) The company will be sold as a whole, including the monopoly rights; however, a regulatory authority to be established will closely monitor you and intervene -by introducing price caps, etc.- if necessary.
c) The company will be sold as a whole. However, the government will also revoke the monopoly rights, open the market to competition, and establish a regulatory authority.
The answer seems obvious to almost all my students: The investor will likely pay more for option (a), and then it will extract this premium from the consumers in the long run.
Then let’s play the role of a consumer now: If you were a consumer (i.e., citizen or a corporation using these services), which option would you wish the government would have chosen, and why?
Again, most people believe that the consumers would prefer option (c), which would mean better service for less money.
Here comes the most challenging part: If you were the decision-maker in the government, what would be your choice?
Unfortunately, the decision-makers usually and easily focus on option (a); since (i) it will bring more cash in the short run so that they will finance budget deficits, etc., and also (ii) avoid potential allegations (such as selling the assets below their actual values) which would arise otherwise.
Therefore, as illustrated above, by delivering “concessions,” the government transfers its monopoly rights to the private enterprises, and -by definition, other companies are excluded, thus competition. However, when this process is not balanced carefully with the principles of competition law and policy, the government’s “most profitable” choice is likely to result in higher prices for consumers and higher costs for the companies using these utilities.
Baris Ekdi highlights the abovementioned dilemma as the Lead Discussant at the OECD Global Competition Forum 2006 in a presentation. To access the presentation in PDF, click on the following icon.
For an actual case related to this dilemma, you can also refer to the following post: THE BATTLE OF MARMARA SEA: WHERE THE THEORY MEETS PRACTICE.
