Sunday, April 10, 2016

Ruinous Competition, in Healthcare or Telecom, Can Destroy Industries

In the telecom, as in any other business, markets “seek” equilibrium, where a relatively stable balance of supply and demand exists. Policies that distort either supply or demand will upset equilibrium.

In Texas, for example, reimbursement rates for services such as Medicaid arguably are simply too low, causing health care workers to be paid less than they might, which in turn causes people to avoid working as health care workers.

As a result, some nurses and staff are quitting their jobs at Texas nursing homes for more money working at McDonald’s.

Texas has one of the lowest Medicaid reimbursement rates, which makes it difficult for nursing homes and service providers to offer competitive wages.

Similar distortions can, and arguably do occur, in the telecom business, where retail prices can be too low to sustain either long term robust investment or investments in human capital. That can happen in any market, be it India, the United States or Western Europe.

Arguably, some policies aimed at increasing competition might have perverse impact, such as removing most of the incentive to upgrade facilities.

You want competitive benefits, but not "ruinous" levels of competition, which eventually drives suppliers out of markets, and reduces competition.

You want competitive benefits, but not ruinous competition, which eventually drives suppliers out of markets, and reduces competition, creating sick industries and markets.

In the aftermath of the “Internet bubble,” that was evident in the global telecom business, which unwillingness to invest on a massive scale, as suppliers lost 65 percent of their value, or went completely bankrupt.  

The point is that efforts to spur competition arguably are good, but policies that promote ruinous competition are to be avoided. We always tend to overshoot the mark, both in terms of deregulating or over-regulating. Both can be destructive.

Some might argue that new regulations on the legacy special access market pose danger.

Cable TV companies--not just telcos--might be subject to special access wholesale rules, under new proposed Federal Communications Commission regulations that are “technology neutral.”

That phrase normally means all suppliers--not only “dominant” telco suppliers--might be covered by rules.

Ignore for the moment the wisdom of applying more regulation to declining services, or extending regulation to all providers instead of loosening regulation for all providers.

One large issue is whether removing profit from any service is likely to spur investment in such services. We probably all know the answer to that question.

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