An introduction to infrastructure services. Presentation outline key characteristic of...
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Transcript of An introduction to infrastructure services. Presentation outline key characteristic of...
An introduction to infrastructure services
Presentation outline
key characteristic of infrastructure industries• economies of scale and/or scope
GATS disciplines on infrastructure industries additional challenges for successful trade policy
reform in infrastructure industries how international trade negotiations can contribute
to successful outcomes
Economies of scale
Definition• A single firm can produce all output more cheaply than
two or more firms
Policy dilemma• Introducing competition may raise total costs per unit of
service delivered – technical inefficiency• Having no competition may allow the incumbent to
restrict quality or quantity and raise prices above cost – allocative inefficiency
When do economies of scale arise?
Fixed costs – costs that are independent of usage• Costs of maintaining local loop• Costs of running airline reservation system• Costs of maintaining electricity transmission lines
→ Total costs per unit lowest when only one firm incurs the fixed costs
Network economies• Easier to optimise operating costs (relative to usage) in a
larger network than a small one
Economies of scope
Definition• A single firm can produce a group of services (eg local
and long distance calls) more cheaply than two or more firms
Can arise when both services share the same fixed cost elements
Policy dilemma• Introducing competition in one service (long distance
calls) may lead to technical inefficiency• Having no competition → allocative inefficiency
Policy provisos
Definitions apply to a given technology - there may be competition from alternative technologies• road vs rail transport• cellular vs fixed line telephony
The threat of entry may discipline pricing• market contestable if there are no sunk costs, ie costs
that cannot be recovered once committed location specific sunk costs are common in
infrastructure industries → inefficient duplication less likely, but monopoly pricing a problem
GATS disciplines on natural monopolies
Monopoly providers bound by general most-favoured-nation commitment
Monopoly providers bound by specific commitments, where these are made, on market access and national treatment • in the monopoly market• in markets where the monopoly supplier competes in the
supply of a service outside the scope of its monopoly rights
What the GATS does not cover
The GATS is silent about the behaviour of a natural monopolist who has critical upstream or downstream linkages to markets where specific commitments are made• Where competitive suppliers have to rely on a
monopolist to provide a critical input eg telco operators need access to the local loop
• Where competitive suppliers have to sell their service to a monopoly distributor eg electricity generators need access to the national transmission system
Challenge for trade policy reform
Liberalising commitments in markets immediately upstream or downstream from a natural monopoly need supporting domestic regulatory reforms to ensure access to the monopolist’s essential or bottleneck facility
Otherwise the monopolist could use its control over the bottleneck facility to thwart competition in the upstream or downstream market
Elements of successful trade policy reform
Decide which parts of the network are natural monopolies In the monopoly service
• Competition for the market can ensure lowest costs and best technology (though pricing still a problem)
• Foreign suppliers could bring better product and process technologies
In downstream markets• Need access regime to ensure downstream suppliers get access to
the monopoly input on reasonable terms In upstream markets
• Need an access regime to prevent holdup and refusal to deal
Universal service obligations
funding USOs other than through cross-subsidies built into the incumbent’s retail price structure• Allowing the monopolist to meet USOs and cover fixed
costs efficiently through other means → the monopolist will not need to inflate the access charge → competition will be more effective
Role of international negotiations
Allowing foreign operators to compete for the market (monopoly service) or in the market (competitive upstream or downstream market) may offer better economic performance
International commitments can lock in current domestic reforms, add credibility to future domestic reforms
Countries can tap into the regulatory expertise of their trading partners → trade in regulatory services?
International negotiations can produce model regulatory regimes eg Reference Paper on Telecommunications