Who is afraid of Market Dynamics ?
The Regulatory Leviathan on Mobile
Markets
Dr. Jan Krancke
T-Mobile International
15th ITS World Conference
4.-7. September 2004
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Content
1. Introduction
2. Dynamic Development of Mobile Markets
3. Regulatory Insights of Transaction Costs Economics
3.1 Theoretical foundation of Transaction Costs Economics
3.2 Applying transaction costs economics to regulation and market efficiency
4. Regulatory Forbearance or Intervention on Dynamic Mobile Markets ?
4.1 Examples for regulation of European mobile markets
4.2 Can regulators perform better than competitive and dynamic markets ?
5. Conclusion
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The Mobile Industry: A Success Story
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The European mobile industry has so far been among the most competitive European
industries. Its contribution to economic growth and employment has been impressive:
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3% of European GDP
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500 million mobile subscribers in Europe in 2004
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4.1 million jobs created world-wide
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European mobile penetration is now at almost 90%
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Mobile telephony has become the standard for voice communications
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Not only operators but also related businesses have profited from the rampant growth of
the mobile industry:

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Network equipment and handset manufacturer
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Operational System and application developers
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Service providers
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Retailers
Positive social impact
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The Mobile Market Today
After more than a decade of continuous growth, the European
mobile market is now facing tremendous challenges

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Investment:
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Huge expense for 3G licences
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Upgrading of 2G networks: GPRS
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Build-up of new networks: 3G and WiFi
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New kinds of content partnerships
Innovation:
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New Services and applications: e.g. 3G, Instant Messaging,
Location Based Services, Blackberry, MMS, VMS, Mobile Payment
Solutions
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New pricing schemes
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New standards
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Fundamental Requirements
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Ubiquitous Mobility
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Interoperability
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Security
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Solution orientation
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Simplicity
Page 5
Content
1. Introduction
2. Dynamic Development of Mobile Markets
3. Regulatory Insights of Transaction Costs Economics
3.1 Theoretical foundation of Transaction Costs Economics
3.2 Applying transaction costs economics to regulation and market efficiency
4. Regulatory Forbearance or Intervention on Dynamic Mobile Markets ?
4.1 Examples for regulation of European mobile markets
4.2 Can regulators perform better than competitive and dynamic markets ?
5. Conclusion
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Main Ideas of Transaction Costs Economics

Transaction costs and institutional economics highlight the crucial importance of
organisational structures as well as transactions and associated costs in the
economic process
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Transaction Cost Economics analyzes the conditions under which welfare-enhancing
transactions take place

Conceptualising organisation structures as devices to economise on transaction costs
can lead to a fresh look at some business and regulatory practices and its
consequences for competition and regulatory policy
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Transaction costs economics supplements other economic approaches
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The Concept of Transaction Costs Economics
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Cost concept associated with transactions
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Based on transaction costs economics predictions concerning the optimal size of firms can be
generated: a firm will grow until the marginal revenue of integrating yet another activity is
equivalent to the marginal costs that have to be incurred in order to integrate that activity
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Corporate structures should be more integrated, the more specific the assets used, the more
important the role of uncertainty, and the more frequently transactions are expected to occur
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Efficiency components (allocative, productive, dynamic)
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Definition of efficiency by Williamson: “An outcome for which no feasible superior alternative can
be described and implemented with net gains is presumed to be efficient.”
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Regulatory Implications of Transaction Costs Economics
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Economic institutions – as well as competition and regulatory authorities - serve the purpose of
reducing transaction costs resulting in different “governance structures
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Cost-benefit-analysis
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Resulting policy implications :
- The existence of barriers to entry as such is not sufficient for demanding intervention by competition or
regulatory authorities as long as it cannot be proven that there is a better structure that can be implemented at
reasonable cost (cost-benefit analysis)
- Costs and potential errors of regulatory measures have to be taken duly into account before any
intervention in markets are justified
- Conglomerate concentration may be explained by looking at the firm as a governance structure. If conglomerate
concentration takes place as a result of economising on transaction costs, this would increase market
efficiency.
- Under certain conditions vertical integration or other forms of governance such as long-term contracts or
exclusive dealing contracts can enhance efficiency. This will be the case when transactions cost savings
outweigh additional organisation costs.
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Content
1. Introduction
2. Dynamic Development of Mobile Markets
3. Regulatory Insights of Transaction Costs Economics
3.1 Theoretical foundation of Transaction Costs Economics
3.2 Applying transaction costs economics to regulation and market efficiency
4. Regulatory Forbearance or Intervention on Dynamic Mobile Markets ?
4.1 Examples for regulation of European mobile markets
4.2 Can regulators perform better than competitive and dynamic markets ?
5. Conclusion
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Examples for Regulation of European Mobile Markets
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Regulation of Mobile Termination Rates
- Market development
- Accusation: „excessive“ termination rates due to monopoly power of each operator for termination on its
network
- UK investigations took more than 4 years
- Regulated termination rates based on LRIC cost modelling
- Transaction costs approach to termination rates
- Benchmarking vs. cost modelling

Regulatory Intervention based on „Consumer Protection“
- „Consumer Protection“; „Fair Pricing“; „Distributive Policies“
- No reference to costs and economic efficiency
- Short term perspective
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Conclusion: In the Field of Regulation
Less Clearly is More
To sustain mobile markets efficiency and to keep incentives for future innovation and investment it is
important to:
- justify each regulatory obligation by a net benefit proven by a cost-benefit analysis taking all transaction
costs into account.
- lower the risk of regulatory failure by applying forbearance to emerging markets and to markets which
are competitive at the retail level. Should non-replicable bottlenecks develop and an abuse of a dominant
position occur, competition law intervention would be sufficient.
- ensure that the stated goals of promoting efficient investment in infrastructure and innovation are not limited
to emerging markets only, but also to replacement investment, up-grade investment, etc.
 Whenever applying price regulation to mobile services, costing and pricing issues have to be treated
in such a way as to ensure competitiveness and dynamism. Refraining from heavy regulatory
intervention such as price regulation is clearly the best solution.
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