The Inefficiency of Perfect Competition in the Electronic Communications Industry

Abstract

Telecommunications industry requires a high and steady level of investments in successive generations of equipments to cope with the exponential growth of traffic volumes. This paper argues that in this context, only imperfections of competition provide market players with the necessary margins to finance the renewal of equipments at the frequency needed to minimize the overall industry cost. A nearsighted policy which would push down the industry profits hoping to reduce prices would be counterproductive as it would have the opposite effect: if profits are reduced below the level needed to sustain the optimal level of investments, production costs would increase, having a negative impact over market prices. Policy should therefore target an optimal competition intensity allowing enough profits to finance this optimal level of investments. The constant reduction of margins in the European telecommunications industry raises an alert for European policy makers: they should be seriously concerned about not overpassing the optimal level of competition.