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ECON105 Principles Of Microeconomics

tag 0 Download 14 Pages / 3,494 Words tag 15-07-2021

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Case 1: Predatory Roaming

They were in the bank, toting guns, as lots of money happened to go from the vault. That was the essence of last week’s claim by Mario Monti, the European Union’s competition commissioner, that mobile phone operators have gouged customers by colluding to raise rates for roaming – ie, when you use your mobile phone abroad. Mr Monti’s case is circumstantial, but he says the network operators will have to answer it

In December Mr Monti’s office issued a report on the market for roaming. Most countries in the European Economic Area (EEA), the report found, have a roaming market that is ripe for collusion. The product is undifferentiated, and the number of sellers small. Pricing in the wholesale market is transparent, making it easy for a market leader to raise prices, and for other operators to take the hint and follow suit. The costs of running mobile networks do not vary that much. As a result, says the report, sellers’ pricing structures tend to run in parallel, at ‘high and rigid’ levels. Mr Monti cites ‘an almost complete absence of competition’, and says that ‘prices appear to be converging’, towards e1 (89 cents) a minute.

To be fair, the conditions for collusion, apart from the small number of sellers cited above, could also be present in a perfectly competitive market. And retail prices in Europe are not quite as similar as Mr Monti’s comments suggest. For a call from Belgium to Britain today, using a British mobile phone, rates range from 51p (73 cents) to 99p a minute. Rates for receiving calls also vary widely. On One2One, a monthly charge of only £2.50 can lower the receiving rate from 76p to 16p. That is an indication of just how low the marginal cost of roaming calls might be.

Looking closely at wholesale rates, the commission found that the cheapest in Europe were about e0.46 a minute. In Belgium, Britain, the Netherlands and Norway, some operators had rates at least twice as high as the average of the five cheapest. Yet even the lowest wholesale rates in Europe may be gouging consumers. Just look at what is on offer in North America. MicroCellnet, a Canadian operator that has 1m customers, recently launched a flat-rate American roaming service: for customers on a standard monthly service agreement, the retail price of calls made anywhere to Canada or within the United States is 20 cents a minute – less than half even the lowest wholesale rates in Europe.

Perhaps Europe’s costs are so different from North America’s that they justify BT Cellnet’s roaming rate of 99p a minute? It seems unlikely. Chris Doyle, an economist at Charles River

Associates, points out that roaming generates up to 35% of European operators’ revenues, although it accounts for a much smaller share of the time customers spend on the telephone. Asked exactly what costs and market forces determine its roaming rates, BT Cellnet says the question is ‘too commercially sensitive to answer’.

Market concentration also points to a lack of competition. In each of 11 EEA countries, a single operator had a market share of at least 50%. Still, the biggest obstacle to a competitive market for roaming may be the ease with which the operators can exploit consumers. They have little incentive to compete over roaming rates – to quit the cartel, Mr Monti might say – since mobile users do not usually use rates abroad as a basis for choosing a provider. Few customers know how much they are paying for roaming. Even fewer actively choose which local network to roam on.

The commission’s report recommends making choice easier for consumers. In the best of worlds, roamers would be able to get rate information piped through to their telephones from various providers, before choosing which service to use. Mr Doyle believes that call-back services, which allow roamers to replace higher calling fees with lower receiving fees, will put pressure on operators to cut rates. If the commission wants to see rates fall swiftly, however, it will have to take action itself.

Tasks

  1. What is the nature of the barriers to entry in the market?
  1. Why is it easy for the operators to exploit consumers in this case?
  1. If the commission does not take action, do you think it is likely that rates will fall much in the future?

Case 2

The main civil use of uranium is to fuel nuclear power plants. Nuclear power plants provide electricity at a high fixed cost, but very low marginal cost. By contrast, plants fuelled by natural gas have relatively lower fixed costs, but higher marginal costs. In the late 1990s, although Western consumption exceeded production by 30,000 metric tons per year, the price of uranium fell owing to estimated Russian stockpiles of 545,000 tons.

Tasks

  1. Why is the short-run demand for uranium relatively inelastic?
  2. What does the long gestation period of nuclear power plants imply for the difference in time between the short and long runs in the demand for uranium?

Case 3

Information constraints are one of the main factors that keep markets separate. Overseas Chinese commerce has been portrayed as ``borderless''. The personal connections of many overseas Chinese business people have allowed otherwise disparate markets to be united. Those people function as middlemen facilitating trades and taking commissions in return.

Recent advances in the Internet and e-commerce, however, have posed significant challenges to the overseas Chinese networks. By providing the technological means for truly ``borderless" trade, the Internet and e-commerce have slashed down the commissions for the middlemen.

Tasks

  1. Middleman commissions can be viewed as government taxes on producers or consumers. Illustrate how the presence of middlemen affects the operation of competitive markets.
  2. Examine the effect of decreasing middleman commissions on the buyer and seller surpluses.

Case 4

Elevators generally break down at random times and for different reasons. Elevator maintenance contractors must have trained service personnel to provide routine and emergency service. Shan On Elevator has 200 service personnel to maintain 1,000 elevators.

Tasks

  1. Suppose that Shan On has received a contract to maintain an additional 1,000 elevators.Do you expect that Shan On will need to double service personnel? Why or why not?
  2. Does the example in (a) illustrate economies of scale or scope?
  3. Escalators and elevators use quite different technology and parts. But many clients operate both escalators and elevators. Are there any economies of scope for a contractor to maintain both escalators and elevators?
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