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When being first doesn't pay

Ironically, access regulation in mobile telephony could be counterproductive, reducing investment and innovation. Joshua Gans and Stephen King explain, Last week the Australian Competition and Consumer Commission held public hearings on competition in the mobile phone industry. At issue was whether the government should intervene and force existing carriers to provide new entrants with access to their mobile phone towers and networks. Not surprisingly, the three existing carriers are concerned that such access regulation will lead to lead to lower prices and undermine the profitability of their mobile phone facilities. Customers and competitors may win, but at what cost? The conflict between facility owners' profits and customer prices is a traditional part of competition policy. But what is neglected in current discussions is the effect of access regulation on future investment. When regulation threatens profits on existing assets, it sends a signal to future investors. If you are planning to invest in infrastructure in the future, do not expect to have full control of your investment. Indeed, if you are one of a number of potential infrastructure developers, it might be better to wait for others to invest. Then you can free ride off these investors, using access regulations as your path to establish a competitive position. But this is where things do not add up. If all potential investors wait for a free ride, no one will invest. They will all wait around the way some people wait around for someone else to clean the toilet or mow the lawn. And consumers will be adversely affected. It is one thing to face high prices as a result of a lack of competition. It is another if there is no price at all because of a lack of investment. When there is only one potential investor, an incumbent monopolist, the waiting game is less of a problem. They might not like regulation but still find it profitable to invest regardless. There is no point in waiting because there is no one else to wait for. But the digital mobile phone industry is one part of telecommunications that is not built around an incumbent verticallyintegrated monopolist. Indeed, there are three Australia-wide digital networks with relatively healthy competition at the retail level. Vodafone does not even directly sell to customers.

The digital mobile phone industry does not have the monopoly structure and bottleneck facilities that usually raise the ire of competition authorities. So, somewhat ironically, access regulation in this industry is likely to have the perverse effect of reducing future investment and innovation. Firms that take risks and build networks for new bands of the radio spectrum should take note. Being first may well carry a penalty. Potential competitors may claim use of your investment on favourable terms. Consider what happens if the logic behind access regulation is extended to other areas of society. We buy a new house and notice that my neighbours, the Jones, have a lawnmower. They don't use it all the time, just once every few weeks. So it lies idle. We could buy our own lawnmower or approach the Jones and negotiate a deal to regularly hire theirs. But access regulation provides an alternative option. Forget about keeping up with the Jones. Instead, regulate the Jones. We can appeal to the competition authorities and demand that we be allowed to use the Jones' mower on "favourable" terms. We will compensate them for the direct costs of my use of the mower. We might also cover some of the costs of buying the lawn mower but only for the proportion of time we use it, a small fraction of the total cost given the time the mower lies idle. To further our case, we might argue that this gives the Jones an incentive to use the mower efficiently and find other users. The competition authorities grant us access. The mower has already been bought and the Jones is compensated for our use -- so everyone appears to win. But sadly, the Jones family had also been considering buying an electric weeder. While the Jones household's valuation of the weeder has not changed, their purchase decision has. Why buy the weeder when you can just wait for someone else in the neighbourhood to get one first? As a result, the neighbourhood, while having nicely mowed lawns, sees the rest of the gardens over run with cape weed. The moves by the ACCC and the Federal government to regulate competition in mobile telephony may destroy the socially beneficial use of radio spectrum. Investors considering purchasing new bands of the spectrum in the upcoming auctions will be looking closely at the outcome of the public hearings. If these hearings lead to regulations that favour "second movers," then the returns from buying new spectrum will be reduced. Future investment and innovation in telecommunications will be threatened. And all this in the name of competition. It might be good to have a few more players in the game, but it is not much fun if nobody is willing to buy a ball. Joshua S. Gans is an associate professor in economics at the Melbourne Business School and an academic associate of London Economics. Stephen

P. King is professor of economics at the University of Melbourne and the co-author of Unlocking the Infrastructure, an analysis of competition policy in Australia. This article appeared in the Australian Financial Review, Friday, 30th January, 1998, p.32.