Monopoly in the Telephone Industry in Mexico

Juan A. CárdenasFall 2007

You can download slides from:www.econ.umn.edu/~jcardena/

About me

Outline

1. Theoretical Framework2. Privatization3. Telmex’s Monopolyconclusions

Outline

1. Theoretical Framework2. Privatization3. Telmex’s Monopolyconclusions

Theoretical Framework

Monopoly is characterized by the existence of a single provider of a good/service.

• Natural or legal barriers.Monopoly has the power to set the price of its good/serviceHow should a monopoly set its price?– Set price (and quantity) in order to maximize

profitsThose profits are bigger that under perfect competition

Theoretical Framework

Hence, QM<Q* and PM>P*; DWL>0Q

P

QM

PM

Demand

MC

MR

Q*

P*

Theoretical Framework

Under which circumstances a monopoly may be desirable?– Existence of high fixed costs such as

infrastructure and R&D• Transportation • Pharmaceutical industry• Telecomm industry

– Otherwise the good/service would not be provided

However, regulation is required to operate the monopoly

Monopolies in Mexico

By 1970-80’s, Mexican government operated inefficiently many industries

(1155 firms, 14% GDP, 5% Labor)

– Telephone (Telmex)– Electricity– Oil and gasoline (PEMEX)– Airlines, train and bus transportation.

Outline

1. Theoretical Framework2. Privatization3. Telmex’s Monopolyconclusions

Privatization

During 1980’s many Latin American countries engaged in structural reforms.

Reorganization of Telmex towards privatization started in 1989.

Group of investors led by Inbursa won privatization process.

Authorities granted 7 years of monopoly power with some regulation and growth goals.

Privatization in Latin America

Countries have benefited from privatization, firm owners are not the only ones keeping the gains.

Some benefits: increased access and quality, investment, improved allocation of resources, public finances.

Failures may occur, but they are not the norm (although they may be widely advertised!).

History

1947TELMEX is created. Merger of L.M. Ericsson (Sweden) and the International Telegraph Corporation (USA).Monopoly on Long Distance Market

1960 Tax on Long distance calls imposed by government. 1972 Controlled by Mexican government1990 Privatization1997 Competition in Long Distance Market

1998 Prodigy Communications Corporation (Internet).Topp Telecom (cellular telephone company).

2000 America Movil (Inbursa - 24% of Televisa)

2007 Cablevision obtains license to provide telephone services.

Outline

1. Theoretical Framework2. Privatization3. Telmex’s Monopolyconclusions

The Telmex Monopoly

Fact: Up to date, Telmex has been operating as a quasi-monopoly

9 out of 10 telephone lines in Mexico are operated by Telmex.

Prices -fixed lines- 2005

Price for residential fixed lines in 2005

Communication access paths per 100 inhabitants (2005)

Public telecommunications investment per capita (2005)

Productivity: Revenue per employee

The Telmex Monopoly

Fact: Up to date, Telmex has been operating as a quasi-monopoly– 9 out of 10 telephone lines in Mexico are

operated by Telmex

– Telcel, or America Movil its wireless phone company, operates almost 80% of all the country’s cell phones

– It is also the main provider of Internet in Mexico

Hard for potential competitors to enter given the network ownership.

Market share of two largest companies (2006)

Mobile phone prices (2006)

Range of broadband prices per mbit/s

Theoretical Framework checklist

Monopoly:• Natural or legal barriers.• Power to set the price of its good/service,• Set price (and quantity) in order to

maximize profits, pMon > pComp

QMon < Qcomp

πMon > πComp = 0

Positive profits?

In April 2007, Forbes said Carlos Slim is now World’s 2nd-Richest Man…

Year Rank

2004 17th

2005 4th

2006 3rd

July 2007 1st

It's been an intriguing year for wealth watching. Since we released our list of The World's Billionaires six months ago, declaring Bill Gates the world's richest man, Mexican telephone mogul Carlos Slim Helú has closed the gap.

Beyond the Telmex Monopoly

Telmex’s operations have financed Mr. Slim’s expansion abroad

His companies have become one of the most important providers of cell-phonesand Internet in Latin America

The perfect formula

He is a philanthropist (“maybe he is trying to soften his image”, New York Times)– He recently donated 100 million to Clinton

Foundation to fight global poverty

The perfect formula

BUT ALSO, he has become “friend” of the most influential politicians – Can Mexicans expect a more effective

regulation?

Privatization in Latin America

Research on privatization suggest that 1. privatization almost always improves performance, 2. but post-privatization governance institutions and market

conditions are extremely important in determining the magnitude of the improvement.

The history of Mexican telecommunications is consistent with both conclusions.

Behind failure: Opaque processes, lack of accountability.Inadequate deregulation and re-regulation (also poor contract design and regulatory capture)Poor corporate governance.

Monthly Expenditures in Telecommunications

24,541

35,782

6,38731,410

35,69538,165

5,521

Outline

1. Theoretical Framework2. Privatization3. Telmex’s Monopolyconclusions

Conclusions

The social losses due to a monopoly are clearly identified by economistsRegulation is highly desirable under this scenarioHowever, policy-makers face big problems attempting to regulate this market structure– Corruption– Difficult for society to demand accountability– Regulatory capture

Questions?