Political Determinants of Competition Mara Faccio and Luigi Zingales June 2016
Motivation • Very large literature in IO about technological determinants of competition in each industry. • Yet, political sector can impact competition in many ways: • licenses and restrictions on entry (Djankovet al., 2002), • tariffs and import licenses (Beckman, 1999), • direct intervention on prices, • expropriation of non-government owned operations, • regulatory decisions, and antitrust intervention, • or just the threat of intervention (or lack thereof). • Is there a political effect on competition?
Outline • Are regulated sectors different? • Why the mobile sector is a good one to analyze • Impact of political connections on competition in the mobile sector • Impact of competition on market outcomes • Why do we care?
2. Why Telecommunication? • Important sector where • technology is similar across countries • there no huge natural advantages (water, cheap energy, etc.) • there are very good data both on prices and quality • still very regulated at the national level (barriers in Europe) • Focus on mobile sector • Better data • Less legacy issues
Data • Telecom quality and prices: • International Telecommunication Union • UN specialized agency for Information and Communication Technologies • GroupeSpeciale Mobile Association • association of nearly 800 operators, and more than 250 companies in the broader mobile sector • Other Telecom Prices: • Numbeo (web site for cost of living adjustments)
Other Data • Institutional variables: • Polity IV Democracy: (additive eleven-point scale (0-10)_ • Presence of institutions and procedures through which citizens can express effective preferences about alternative policies and leaders. • Existence of institutionalized constraints on the exercise of power by the executive. • Guarantee of civil liberties to all citizens in their daily lives and in acts of political participation. • Connections • Extension of Faccio (2006) • Biographies of over 50,000 executives and “top” employees affiliated with the telecom operators from Capital IQ. Political connection: Fraction of executives and board members of a given operator who served as government minister, chief of state, or member of parliament • Competition?
Market Share of the Largest Four Operators (U.S.) Note: Q1 2000 through Q3 2015. Based on GSMA data.
Is this effect plausible? • Political control over: • Licenses • Auctions and conditions of auctions • Antitrust enforcement in mergers • Antitrust enforcement against potential collusion on prices • We study the 4 largest changes in C2 in absolute value • All driven by political decisions
4. Impact of competition on market outcomes • Prices/mark-ups/revenues per customer • Quality • Investments • Employment • Wages • Churn
Price of What? • ITU: price of a standard basket of mobile monthly usage for 30 outgoing calls per month (on-net, off-net to a fixed line and for peak and off-peak times) in predetermined ratios, plus 100 SMS messages, • GSMA: ARPU = average revenue per unit • Effective price per minute • Ebitda Margin
Summary • More competition leads to lower prices • No (or positive) effect on quality and investments • No effect on employment, wages, and churn
Why do we care about market-power? • Not because of the Harberger’striangle (it is small) • But because of • Rent seeking (Tullock (1967), Kruger (1974)) • Negative distributional effects • Important in determining the standard of living of average American • Potential determinant of inequality • Carlos Slim lost $27 bn in wealth as a result of deregulation
Conclusions • More political connections and less democracy lead to more concentration • More concentration leads to • Higher mobile prices • No more investments, employment, or quality of service • Low levels of competition represent a significant tax on consumers • Can this explain the raising inequality?