Markets Provide Clear Signals for Telecommunications

Telecommunications technology is extremely complex. Even though relatively few specialists truly understand its inner workings, telecommunications companies have incentives to make their services as easy as possible for consumers to use. Unfortunately, regulators are subject to different incentives that result in higher cost and limited service. This is important to consumers because the average annual telephone bill is about $525 per household.

A firm survives by earning profits. It tends to be rewarded with more customers-and more profits-by making its products easy and inexpensive to use. Software companies launch new products that they say are "as easy to use as brand X." Fast-food chains build restaurants at major highway interchanges and advertise "easy-off, easy-on" access to travelers. Likewise, telecommunications companies find it in their self-interest to make it easy for consumers to place phone calls, view cable television, and get cash from automated teller machines.

Incentives for regulators are quite different than those for producers. Regulatory bodies are subject to pressure from politicians and the special interests who influence them. Consumers, unless they wield political power as an interest group, are in a weak position to influence legislators and regulators to act in the consumers' best interests.

A proposed Michigan Telecommunications Act was unveiled on September 27. It appears to continue the regulatory trend established by the 1992 rewrite of the state's telecommunications law which allowed greater competition and lessened price regulation. Two of the new bill's many provisions dramatize the conflicting incentives of producers and regulators.

One minor provision would limit charges for telephone calls connected by so-called alternative operator services such as those often encountered at hotel or pay phones. Another would allow phone companies more freedom to charge on a per-minute basis for local calls.

It may appear that limiting prices on some calls would benefit consumers and that allowing phone companies to charge on a per-minute basis may harm consumers. A closer look tells us otherwise.

One example of a price cap is the 1992 federal re-regulation of cable television rates. Citing high cable company profits, proponents asserted that mandatory price limits would save consumers billions of dollars. Two things happened, but consumer savings was not one of them.

First, cable service decreased and real costs increased. Cable companies saddled with the new rate caps just scrambled the option packages offered to subscribers. Many consumers found that prices of "basic" cable channel packages did indeed drop, but popular channels from the "basic" package were often moved to higher-priced "premium" packages to try to lure subscribers to "premium" packages. Real costs increased, service decreased, and the market responded. Cable subscription growth dropped after 1992 for the first time in over a decade.

Second, by capping cable rates but still affirming the companies' protected monopoly status, the federal government kept out competition that would have tended to drive down costs and increase service to consumers. High cable company profits (if they indeed were high) serve a crucial role in a competitive economy. High profits are a loud and clear signal to potential competitors that there is money to be made. Competitors entering the market to compete for profits pressure the original company to decrease prices or improve service to keep from losing business to the new firms. Price caps hurt consumers by squelching profit signals that lure competition. Capping rates for alternative operator services in Michigan would do the same.

One other provision of the proposed act-allowing local phone companies more freedom to charge per-minute rates for local calls-would result in more equitable costs and expanded options for consumers. The current law can force companies to charge the same amount for leaving a ten-second answering machine message as it does for phoning a local on-line computer service for three hours. Basic fairness is the issue here. The current law is analogous to a gas station that charges by the fill-up instead of by the gallon-those with small tanks (or shorter calls) subsidize the rest. The proposed law is analogous to asking customers to pay only for the gallons they put in their tank, and would discourage them from using more than they need.

Another benefit of allowing more freedom to charge per-minute rates for local calls is that it would lead to greater consumer choice between per-call or per-minute charges for local service. Each customer could evaluate their individual needs and select the best plan.

Only the marketplace has the sort of built-in incentives that tend to reduce prices and improve service. Regulatory bodies serve different interests, and their actions often result in harm to consumers, despite good intentions.