Competition reform and household welfare: A microsimulation analysis of the telecommunication sector in Ethiopia

Carlos Rodríguez-Castelán,Abdelkrim Araar,Eduardo A Malásquez,Rogelio Granguillhome Ochoa

doi:10.1016/j.telpol.2021.102243

Carlos Rodríguez-Castelán, Abdelkrim Araar + Show 2 more

Open Access

https://doi.org/10.1016/j.telpol.2021.102243

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Abstract

This paper presents a novel simulation method for estimating the likely welfare effects of policy reforms aimed at increasing competition in strategic economic sectors such as mobile phone services. The proposed method relies on a partial equilibrium simulation approach and estimates the welfare impacts on current consumers and the potential welfare effects among new consumers brought into the market by changes in prices due to competition. This approach is applied to the information and communication technology (ICT) sector in Ethiopia, one of the three countries in the world with a monopoly in the market for mobile phone services. Based on household budget survey data for 2015/16 and departing from a baseline reform scenario that dilutes the market share of the state-owned monopoly to 45 percent, the simulation model estimates a 25.3 percent reduction in the price of mobile services and an increase in 5.7 million new users of mobile services. The predicted drop in prices and increased users would generate a combined relative welfare gain of 1.18 percent (1.09 percent among current users and 0.09 percent among new users), that could be translated into a 0.31 percentage point decline in the national poverty rate and equivalent to lifting about 275,000 people out of poverty. Alternative reform scenarios that dilute the market share of the monopoly to 75 percent and to 30 percent are expected to reduce poverty rate in 0.13 and 0.52 percentage points, respectively. The method proposed in this study represents a useful tool for promoting competition reforms in developing countries, particularly in sectors known for excluding significant segments of the population because of high consumer prices.

Highlights

Broad access to information and communication technology (ICT) has great potential for poverty reduction and inclusive growth in developing countries, where ICT adoption is growing rapidly (World Bank 2016)
This paper proposes a practical microsimulation approach to assessing the distributional impact of enhancing market competition in key sectors of economic activity
The approach combines data from household budget surveys with the parameters of reform scenarios in selected markets to estimate the welfare gains among current and new consumers likely to benefit from enhancing competition

Summary

Introduction

Broad access to information and communication technology (ICT) has great potential for poverty reduction and inclusive growth in developing countries, where ICT adoption is growing rapidly (World Bank 2016). Recent studies have shown that the expansion of broadband through fiber optics and mobile internet produces substantial benefits in household income and consumption, employment and productivity, and helps lift people out of poverty (see Bahia et al 2020 on Nigeria, which accounts for the largest ICT market in Africa; Masaki, Granguillhome Ochoa, and Rodríguez-Castelán 2020 for Senegal; and Hjort and Poulsen 2019 on Africa). That ICT markets in most countries in Africa rank among the most concentrated in the world has limited the potential for equity and efficiency gains in digital technology adoption among households and firms across the region.. The high prices of ICT services reduce the potential for the adoption of digital technologies because poorer households may be priced out of these services, limiting their capacity to harness the benefits of ICT (Rodríguez-Castelán et al 2020)

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