Tuesday, May 24, 2016

Is "Zero" a Price?

Is “zero” a price? The answer matters, because there are many instances where regulators insist they are not in favor of rate regulation, at least when markets are competitive.

In other words, whenever a regulation mandates, or prohibits a “zero” price, that is an instance of rate regulation.

This matters since banning or enabling zero pricing is rate regulation, even when rate regulation is expressly not within policy guidelines. That recently has become an issue where zero rating of mobile Internet access is outlawed.

The essence of rate regulation is that some prices are not allowed, while other prices are mandated. Generally, we are accustomed to prices being limited to keep them low.

What is different with bans on zero rating is that the restriction applies in the other direction: governments make illegal the offering of “no incremental charge” or “free” access.

Generally, price regulation is used when an entity has a monopoly or a dominant market position that gives it excessive market power. So prohibiting “free” as a price implies concern about monopoly power.

Regulators sometimes insist they are not engaged in rate regulation when mandating that prices of zero are not lawful. That is wrong. Zero is a price, and mandating or prohibiting zero rating is rate regulation.

The answer also matters because rate regulation--whatever its other suggested benefits, also tends to depress investment.

That means rate regulation, all other things being equal, leads to lower investment by competitors in a market who own facilities, even if it increases demand by customers who want to use that rate-regulated network.

To the extent that bans on zero rating impose price rules, it is a form of rate regulation, even if not formally a matter of formal “rate setting.”  While paid services have prices that are acknowledged to be “rates,” it is much less obvious that “zero” also is a price.

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