EU Regulation Intensifies Competition

State regulation of competitive industries aims at creating a lot of competitiveness. The current EU regulation puts these goals into effect considerably better than other regulation models in other countries. A comparison to the regulatory practice of the telecommunications sector in Switzerland and the EU confirms this fact. These are the findings of current projects regarding web-based industries and competition at the Centre for European Economic Research (ZEW) in Mannheim.

In the EU Member States, the cost-based charges for accessing the telecommunications networks are regulated ex-ante by each government. The amount of these charges should offer incentives to network providers to maintain and expand their networks. At the same time, the market entry of new service providers, which also have to use the network, is not to be made difficult as price competition is desirable and give advantages to consumers.

In contrast, the regulation in Switzerland is done ex-post. The regulating authority of the telecommunications market only interferes if the network provider and the service provider cannot agree on the charges for using the network. Usually, however, the two parties come to an agreement, thus making the government’s interference not necessary.

The ZEW analysis using a theoretical model indicates that the ex-post regulation involves the danger of excessive charges for accessing the networks. This is because the network provider and the service provider can agree on excessive prices without the interference of the governmental regulating authority. The incentive for the network provider is receiving a higher charge for providing the access to its infrastructure, whereas the service provider passes on these charges to the customers. This prevents a fierce competition on prices for the services, which are also offered by the network provider, and is done at the expense of the consumers as they have to pay more for the services. This regulatory practice explains the partly higher prices for telecommunication services in Switzerland and the fact that the regulating authority hardly ever has to regulate the charges.

Thus, the ex-ante regulation in the EU is better for a higher competition in the performance-oriented markets. It is required that the regulating authorities recognize the costs for providing services efficiently, and that market entry is possible for all service providers. On these terms, the service providers themselves are interested in lower charges, so that the regulating authority always has to review the latest ones. Therefore, the end-consumers in the EU benefit from an efficient regulating authority.

For further information please contact

Dr. Patrick Beschorner, E-mail: beschorner@zew.de