U.S. Wireless Prices Have Dropped 50 Percent Since 1999

By Gary Kim, Contributing Editor

The average price for U.S. wireless service in 2009 was about 50 percent of the price in 1999. In other words, prices have fallen by half in a decade, according to the Government Accountability Office.

That does not mean growing concentration in the industry could not become a problem. Indeed, the GAO thinks the Federal Communications Commission should spend more time and effort monitoring ongoing concentration in the wireless industry.

But it does not seem there is a problem at the moment, despite the fact that the business is becoming more concentrated. From 2006 to 2009, for example, AT&T's (News - Alert) market share grew from 26 percent to nearly 30 percent, while Verizon's share grew from 25 percent to 32 percent, the GAO notes. 

On the other hand, Sprint, which had nearly 23 percent market share in 2006, slipped to about 17 percent share in 2009. But T-Mobile (News - Alert) USA grew from nearly 11 percent to nearly 12 percent. 

Share held by "all other carriers" declined from nearly 11 percent in 2006 to less than four percent in 2009. Leap grew from about one percent to nearly two percent, U.S. Cellular (News - Alert) slipped slightly from 2.5 percent to 2.3 percent. 

But the GAO points out that "a high concentration of firms in an industry does not necessarily mean that the interests of consumers are poorly served." 

"In particular, by enabling large national carriers to exploit economies of scale, consolidation can create greater productivity and economic efficiency," the GAO says. 

This industry consolidation may have especially improved the efficiency of the large national carriers, allowing them to offer more wireless services for similar or lower prices, says the GAO. 

Some economists have made the same arguments about even more-concentrated markets, such as fixed-line services offered by cable companies and telcos in local markets. In a highly-capital-intensive industry, only a few facilities-based carriers are able to exist. 

Regulators and lawmakers are right to monitor developments, but experience so far, even in the more-concentrated fixed-line business, suggest that workable levels of competition, delivering measurable benefits to consumers, continue to be possible even when markets are highly concentrated.

You can read the full report here.So can price and other forms of competition beneficial for users still occur when markets are highly concentrated? Yes, say Jerry B. Duvall and George S. Ford of the Phoenix Center for Advanced Legal and Economic Public Policy Studies. The question now matters, once again, as the Federal Communications Commission seems to be hinting it thinks the U.S. wireless market is growing unduly concentrated.

The important observation is that, in some markets, even high levels of supplier concentration do not preclude important, even robust levels of competition, on price, quality and other dimensions.

When analyzing levels of competition in a market, economists often, and rationally,  infer it from the level of industry concentration, where higher levels of concentration indicate the presence of market power. But industry concentration is related to the size of a market as well as high sunk costs or intense price competition, or some combination.

High industry concentration can be the result of a limited market or high fixed costs, as for a water, electricity or wastewater system, for example, all cases where fixed costs are so that facilities-based competition is not possible.

In some other markets, high capital investment requirements can create huge barriers to entry. Where that barrier exists, even when competition increases because of new entrants in a market, market concentration could still increase - even in the face of price competition. Market concentration appears to reach a lower bound, despite continuing growth in the size of the market.

It is possible that the apparent lower bound on market concentration could reflect economic and technological constraints that continuing growth in the number of competitors will not, and cannot, affect. In other words, some markets might always feature few competitors, for logical reasons. Few today would agree that telecommunications is a natural monopoly. But neither would many agree that the number of facilities-based contestants can be a large number.

The implication is that telecommunications market structure will always be relatively concentrated compared to industries where entry does not require substantial upfront capital costs.

The relationship between the number of firms and market power, where market power is defined as the ability of firms to price above marginal cost, implies that that some communications firms will now, and in the future, possess some degree of market power, Duvall and Ford say. Competition will not be "perfect," but rather workable.

Still, there is an important observation: the more intense is price competition the higher is industry concentration. The typical view of competition has price competition increasing with declines in industry concentration. In other words, the more firms in a market, the more “competitive” that market is.

The implication is that high market concentration can be the result of intense price competition, rather than market defects.

In the summer of 2000, the proposed merger of MCI-WorldCom and Sprint (News - Alert) was abandoned due to the challenge of the merger by antitrust authorities. In retrospect, one can note that faulty conclusions were drawn from incomplete analysis. Market power in the long distance industry actually was illusory. Even strong industry concentration did not actually imply serious market power, as price competition, for example, was intense.

The obvious implication is that high levels of wireless industry concentration do not preclude or foreclose robust levels of competition. In fact, robust competition causes industry concentration. See HERE, for example.

(source: http://www.tmcnet.com/channels/telecom-expense-management/articles/97963-us-wireless-prices-have-dropped-50-percent-since.htm)