CASE 1: Predatory Roaming

CASE 1: Predatory Roaming
They were in the bank, toting guns, as lots of money happened to go from the vault. That was
the essence of last week’s claim by Mario Monti, the European Union’s competition
commissioner, that mobile phone operators have gouged customers by colluding to raise rates
for roaming – ie, when you use your mobile phone abroad. Mr Monti’s case is circumstantial,
but he says the network operators will have to answer it
In December Mr Monti’s office issued a report on the market for roaming. Most countries in
the European Economic Area (EEA), the report found, have a roaming market that is ripe for
collusion. The product is undifferentiated, and the number of sellers small. Pricing in the
wholesale market is transparent, making it easy for a market leader to raise prices, and for
other operators to take the hint and follow suit. The costs of running mobile networks do not
vary that much. As a result, says the report, sellers’ pricing structures tend to run in parallel,
at ‘high and rigid’ levels. Mr Monti cites ‘an almost complete absence of competition’, and
says that ‘prices appear to be converging’, towards e1 (89 cents) a minute.
To be fair, the conditions for collusion, apart from the small number of sellers cited above,
could also be present in a perfectly competitive market. And retail prices in Europe are not
quite as similar as Mr Monti’s comments suggest. For a call from Belgium to Britain today,
using a British mobile phone, rates range from 51p (73 cents) to 99p a minute. Rates for
receiving calls also vary widely. On One2One, a monthly charge of only £2.50 can lower the
receiving rate from 76p to 16p. That is an indication of just how low the marginal cost of
roaming calls might be.
Looking closely at wholesale rates, the commission found that the cheapest in Europe were
about e0.46 a minute. In Belgium, Britain, the Netherlands and Norway, some operators had
rates at least twice as high as the average of the five cheapest. Yet even the lowest wholesale
rates in Europe may be gouging consumers. Just look at what is on offer in North America.
MicroCellnet, a Canadian operator that has 1m customers, recently launched a flat-rate
American roaming service: for customers on a standard monthly service agreement, the retail
price of calls made anywhere to Canada or within the United States is 20 cents a minute –
less than half even the lowest wholesale rates in Europe.
Perhaps Europe’s costs are so different from North America’s that they justify BT Cellnet’s
roaming rate of 99p a minute? It seems unlikely. Chris Doyle, an economist at Charles River
Associates, points out that roaming generates up to 35% of European operators’ revenues,
although it accounts for a much smaller share of the time customers spend on the telephone.
Asked exactly what costs and market forces determine its roaming rates, BT Cellnet says the
question is ‘too commercially sensitive to answer’.
Market concentration also points to a lack of competition. In each of 11 EEA countries, a

single operator had a market share of at least 50%. Still, the biggest obstacle to a competitive
market for roaming may be the ease with which the operators can exploit consumers. They
have little incentive to compete over roaming rates – to quit the cartel, Mr Monti might say –
since mobile users do not usually use rates abroad as a basis for choosing a provider. Few
customers know how much they are paying for roaming. Even fewer actively choose which
local network to roam on.
The commission’s report recommends making choice easier for consumers. In the best of
worlds, roamers would be able to get rate information piped through to their telephones from
various providers, before choosing which service to use. Mr Doyle believes that call-back
services, which allow roamers to replace higher calling fees with lower receiving fees, will
put pressure on operators to cut rates. If the commission wants to see rates fall swiftly,
however, it will have to take action itself.
Questions
1. What is the nature of the barriers to entry in the market?
2. Why is it easy for the operators to exploit consumers in this case?
3. If the commission does not take action, do you think it is likely that rates will fall
much in the future?
ANSWERS
1. What is the nature of the barriers to entry in the market?
The barriers are either erected artificially or strategically. Structural or natural barriers
are used by monopolies or oligopolies to manipulate entry reactions to the market.
They include:
 Network Effects.
 Ownership or control of a key scarce resource.
 High set-up costs.
 High research and development costs.
 It involves large technological superiority over the competitors.
 The ability to control an essential resource which is required in production
2. Why is it easy for the operators to exploit consumers in this case?

The operators can really exploit the consumers since they have a big monopoly in the
market and they are assured that they have all the capabilities in the market and if they
take any action towards the consumer they cannot seek any other alternative since the
barriers of entry are so tight.
 Emerging markets
Nations of emerging markets have established infrastructures for consumer market.
Therefore new entrants are mandated to develop their operations to a level almost of
the domineering company.
 Working place break-through
New entrants should be weary of the consistency and dynamism of their venturesome
market. Some markets are termed most competitive and would require adequate
measures for them to break into.
 The entry cost
Necessary infrastructure to facilitate the operations of a new entrant would amount to
a huge investment for expenditures. Some of the aforesaid levels are too much for a
new entrant to manage.
3. If the commission does not take action, do you think it is likely that rates will fall
much in the future?
The future for new entrant firms in markets can be determined through artificial
strategies as follows; thus removing the mandate of commissions in the regulation of
rates. Predatory pricing, Limit pricing, predatory acquisition, switching costs,
advertising, a strong brand and loyalty schemes. The rate will not fall in future and
instead is expected to increase in the future since the barriers are so tight for the new
entrants in the market. Therefore, the commission should take very fast action

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CASE 1: Predatory Roaming

Market concentration also points to a lack of competition. In each of 11 EEA countries, a

2. Why is it easy for the operators to exploit consumers in this case?

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