Pricing & Price Regulation

Transcription

1 Pricing & Price Regulation Dr Christoph Stork

2 Table of Contents Regulating Prices Tariff Design

3 Elasticity of Demand responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. percentage change in quantity demanded in response to a one percent change in price E i = ΔQ ΔY E P = ΔQ ΔP

4 Economics Background Operators want to maximise profit: Max(profit=q*p-c) Government maximise welfare and provide affordable service to the poor Operators and governments may disagree on issues such as service to the poor (more social policies than as economic policies) Operators and governments may disagree on price discrimination: price discrimination can increase profit but may not be fair... In perfectly competitive markets: A profit-maximising operator will charge prices that are equal to marginal cost. Marginal cost pricing also maximises welfare Interests of the operator and the interests of the government coincide

5 Tariff Design

6 Marginal Cost Pricing Profit-maximising monopolies/ oligopolies will set prices higher than marginal costs Loss in welfare relative to the perfectly competitive situation Government has an interest in lowering prices to their respective marginal costs However, marginal- cost pricing may not be financially feasible for the operator because of scale economies, fixed, joint and common costs

7 Ramsey Pricing Profit-maximising price structure causes the quantities that customers want to purchase to deviate as little as possible from what customers would purchase at marginal-cost pricing Inverse elasticity rule: Marginal cost + mark-up Mark-ups lower for services with high demand elasticity Mark-up higher for services with low demand elasticity Economically efficient... maximise welfare under certain circumstances May not be consistent with the government s goal of providing affordable service to the poor Ramsey pricing is a form of price discrimination: one type of customer to pay a higher mark-up above marginal cost than another type of customer

8 Linear, Multipart Optional Prices Linear Tariff: single price for the service eg flat-rate telephone service or prepaid mobile Multipart Tariff: separate prices for different elements of the service eg Access and Usage ie monthly subscription and airtime

9 Optional Tariffs The optional tariff is closely related to the multi-part tariff Menu of pricing plans Customer chooses the pricing plan that best fits the own consumption preferences Optional tariff scheme can be profit maximising for the operator and make customers better off Most optional tariffs include multi-part pricing Multipart tariffs and optional tariffs are situations where the operator s interests and the government s interest often coincide Multipart tariffs provide greater welfare than linear tariffs when the linear price does not equal marginal cost Optional tariffs make customers better off than single tariffs because customers can choose the tariff that best meets their needs

10 Non-linear Prices Prices vary depending on the amount of consumption by the customer The more you top up the cheaper is the minute call ( Cameroon) The longer you talk the cheaper the rate (MTC first minute 1.89 then 0.29 cents) (Vodago, Virgin SA prepaid) Non-linear prices are like multipart prices in that they allow the operator to charge prices at the margin that reflect marginal cost...(the 0.29 cents eg)

11 Peak-load Pricing Peak-load pricing is useful when marginal costs vary depending on when the service is used Operators build networks to serve the peak demand (business hours) Network costs are caused by peak demand and not demand during off-peak hours Profit maximisation if charging higher prices during peak hours and lower prices during off-peak hours Operator and government interests coincide

12 Dynamic (Realtime) Pricing Help alter subscribers' behavior by shifting usage to underutilized cell areas or less congested time slots in order to increase network usage By offering dynamic discounts, operators can even turn noncustomers into customers, increasing overall usage and revenue without compromising existing margins Vodacom Yebo4less: up to 99% discount MTN Zone: up to 95% discount MOU up ARPU constant

13 Summary In several situations the operator s preferences and the government s preferences coincide with respect to tariff design Regulator can do no better than to let the operator use its superior knowledge of its abilities and of the market to choose efficient pricing arrangements Situations where it may be beneficial to intervene include: Pricing for the poor Controlling undue price discrimination Important to review the cost basis for pricing from time to time Otherwise one only assumes that cost are at marginal levels Cost decrease with technological advances, and higher subscriber numbers and usage

14 Regulating Prices

15 Price Regulation Forbearance is generally the situation where the regulator has authority to regulate prices but chooses to not do so Deregulation is generally the situation where the regulator lacks the authority to regulate prices Regulation: Rate of return regulation Price cap regulation (RPI-X regulation) Revenue cap regulation The appropriate combination of rate of return tools, price or revenue caps and length of time between price reviews depends on a country s goals, institutional strength, level of competition, and economic stability etc

16 Objectives Financing of network infrastructure and operation Efficiency (Allocative / Productive / Dynamic) Equity (Social) maximising welfare

17 Rate of Return Regulation Rule-based price regulation Adjusts overall price levels according to the operator s accounting costs and cost of capital Provides flexibility in addressing changes in costs and earnings Provides the greatest predictability of earnings No incentive to operate efficiently (minimise cost/innovate)

18 Price Cap Regulation (RPI-X) Allows the operator to change its price level according to an index that is typically comprised inflation and a productivity offset the X- factor Adjusts the operator s prices according to the price cap index Regulator typically constructs service baskets in line with price elasticity... This improves economic efficiency, but may be contrary to certain regulatory goals, such as protecting poor customers Price and revenue cap regulation provide the greatest pricing flexibility for the operator. Greatest predictability for overall price levels

19 Revenue Cap Regulation Revenue cap regulation is similar to price cap regulation in that the regulator establishes an I X index...a revenue cap index, for service baskets and allows the operator to change prices within the basket so long as the percentage change in revenue does not exceed the revenue cap index. Revenue cap regulation is more appropriate than price cap regulation when costs do not vary appreciably with units of sales. An example might be electricity distribution where distribution lines drive costs, but prices are often based on kilowatt- hours of electricity sold. Revenue caps also relieve the regulator from the duty of overseeing price structures, which in some cases can be costly to regulate because they are complex.

20 Earnings Sharing Hybrid regulation where the regulator allows the operator to keep some portion of the earnings it receives from the market and requires the operator to give the rest to customers: price reductions, refunds, increased investment

21 International Best Practice Regulate wholesale and let retail untouched unless anticompetitive retail pricing is persistence Then still: as little as possible

22 Monitoring Retail Prices

23 Need to Regulate Full competition in the telecom sector cannot be expected anywhere anytime soon Until then, fair competition needs to be established or maintained through sector specific regulation Price is the ultimate indicator for competition Lower prices expand markets to rural areas and lower income groups...not universal service obligations Monitoring prices and hence cost to end-user remains a key regulatory function

24 Regulatory Applications 1. Consumer protection, price transparency and effective cost to consumers. Example Namibia: 29 products, constantly changing promotions, insufficient information on webpage and form retail outlets Example Vodacom South Africa: 37 products varying on every single aspect (peak/off peak, on/of-net, fixed, bundled airtime, handset...) 2. Defining universal service obligations in terms of affordability, alternative approach to the usual geographic access obligations 3. Monitoring impact of regulatory interventions such as licensing, retail and wholesale tariff regulation, number portability...

25 OECD Mobile Basket Methodology Pricing products for basket of minutes and SMS Only Dominant operators Together 50% market share: 2006 Definition Largest 2 operators: 2010 Definition Cheapest product from dominant operators for country comparison

26 OECD 2006 Definition

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29 Exercise Cell2Cell own Network Peak Cell2Cell own Network Off Peak Cell2Cell own Network Off Off Peak Cell2Cell other Network Peak Cell2Cell other Network Off Peak Cell2Cell other Network Off Off Peak Cell2Fixed Peak Cell2Fixed Off Peak Cell2Fixed Off Off Peak SMS Peak ON-NET SMS Peak OFF-NET Low Medium High

30 Translation into minutes Cell2Cell own Network Peak Cell2Cell own Network Off Peak Cell2Cell own Network Off Off Peak Cell2Cell other Network Peak Cell2Cell other Network Off Peak Cell2Cell other Network Off Off Peak Cell2Fixed Peak Cell2Fixed Off Peak Cell2Fixed Off Off Peak SMS Peak ON-NET SMS Peak OFF-NET Low Medium High

31 NEPRU Price Baskets

32 NEPRU User Baskets The new methodology establishes the cost to the end-user on a monthly basis for six usage bundles Passive Usage Bundle: A user that makes very few and short calls and only rarely send SMS. A Passive user uses the mobile phone mainly to be reachable and for emergencies Low Usage Bundle: User that makes on average one call a day and sends one SMS to someone every second day Medium Usage Bundle: User that makes about four calls a day and sends one SMS a day High Usage Bundle: User that makes about six calls a day and sends two SMSs a day International Usage Bundle: Same as the high usage bundle only with additional international calls and SMS to three neighbouring countries and the USA Prices are often quoted per minute but billing is in sub units (in six second intervals e.g. for MTC post-paid)

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35 Limitations Methodology does not take into account the size of a network. If, for example, someone changes from Network A to Network B but most of the contacts that this person usually calls are on Network A, then this person will now make more off-net calls than on-net ones, which are typically more expensive. Free handsets bundled with post-paid contracts can-not be taken into account by this methodology. This needs to be considered when comparing the cost of two usage bundles. The cost difference between two bundles, one with and one without a free handset can be interpreted as the price the con- sumer pays monthly for the handset. A price comparison does not take into account the quality of service, coverage and roaming agreements. This price comparison is aimed to assist consumers in picking the right packages but it cannot be the only source for a decision.

36 OECD 2010 Definition

37 General Basket Rules At least two largest network operators are covered for each country, based on subscriber numbers. The operators covered should between them have at least 50% of the market share. Discount brands offered by the network operators will only be included when clearly linked with the network operator s website and brand. Offers shall be typical 2G and 3G services with the main focus on voice. A range of relevant price packages shall be covered, allowing the lowest cost package to be selected for each operator. Only price presented clearly as current on the operator web pages will be considered. The basket methodologies can be used to compare different types of offers such as pre-paid, post-paid or SIM-only plans. Nonrecurring charges are distributed over 3 years. Selective discounts are calculated with the algorithm described in the section on selective discounts above. The value of call and message allowances included in the package will be deducted from the usage element of the basket, up to the value of actual usage. Allowances are deducted in the following order: Selective discounts, most restricted minute allowance, least restricted minute allowance, message allowance, value allowance. Specific volume discounts will be deducted from the total cost at the end. Off-net mobile-to-mobile charges are weighted according to subscriber numbers for each country, where relevant for the pricing of calls. Call costs are calculated using the duration of D + (Unit(seconds)-1)/2, based on basket call duration D given below concerted to seconds and average per second charges. The Unit is the billing unit in seconds.

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40 Basket Methodology Weaknesses No one is average Baskets do not reflect the most popular package but the cheapest product The same basket is used for all operators: offnet/on-net ratio depends on market share Only dominant operators - new entrants and small operators are likely to be price challengers

41 Expanding OECD Methodology to all operators and all products in a country Comparing Countries OECD Basket Methodology Comparing Operators Comparing Products

42 Comparing Countries Comparing cheapest product available from dominant operators cheapest operator most expensive operator Comparing the difference between cheapest in country - cheapest from dominant operators cheapest in country - cheapest from most expensive operator Benchmarking

43 Prepaid OECD Low User basket in US$ Cheapest operator Dominant operator Ghana 2.29 Ghana 3.04 Tanzania Kenya Nigeria Ethiopia* Rwanda Benin Botswana Tunisia Namibia Senegal Uganda Zambia Côte d Ivoire Mozambique South Africa Cameroon Ethiopia* Botswana Tunisia Kenya Senegal Zambia Rwanda Uganda Tanzania Mozambique Benin South Africa Nigeria Côte d Ivoire Namibia Cameroon Burkina Faso Burkina Faso Most expensive operator Ghana 3.15 Ethiopia* 3.74 Tunisia 5.36 Kenya 5.93 Botswana 6.66 Rwanda 6.87 Uganda 7.04 Tanzania 7.26 Senegal 7.52 Nigeria 7.76 Zambia 8.18 Mozambique 8.32 Benin 8.81 Namibia 8.96 Cameroon 9.3 Côte d Ivoire 9.54 South Africa Burkina Faso 12.54

44 Feb 2010 Low OECD user basket for prepaid Difference Dominant vs cheapest in a country Operators Years since last entry Cheapest Operator for low user basket Dominant Operator Botswana 0% 3 2 Mascom Mascom Ethiopia* 0% 1 11 ETC ETC Mozambique 0% 2 7 mcel mcel Senegal 0% 3 1 Orange Orange South Africa 0% 4 4 MTN MTN & Vodacom Tunisia 0% 2 8 Tunisiana Tunisiana Zambia 0% 3 7 MTN Zain Cameroon 8% 2 10 Orange MTN Uganda 9% 4 2 Uganda Telecom MTN Burkina Faso 12% 3 9 Telcel Zain Côte d Ivoire 14% 4 3 Moov Orange & MTN Ghana 25% 5 3 Tigo MTN Benin 34% 5 3 Libercom MTN & Moov Kenya 44% 3 2 Orange Safaricom Namibia 44% 3 1 Telecom Namibia MTC Rwanda 46% 3 1 Rwandatel MTN Nigeria 53% 7 4 Starcomms GloMobile & MTN Tanzania 60% 9 5 Benson Vodacom

45 Each country has a different story Number of operators Sequence of market entry Market size Market shares Market segmentations User profiles Price and income elasticity of demand Lock-in Club effects Brand loyalty Strength of regulators Past regulatory interventions Laws / licences Disposable income GDP growth Substitutes (public phones, fixed) (Country dummy may be the main explanatory power of panel studies)

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52 Telecom Namibia Switch

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54 switchmobile on Switch switchmobile

55 Leo

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58 Exercise Find out the prices for low medium and high user baskets of OECD 2006 definition for Leo, MTC and Switch Which product is the cheapest and how much does it cost?