The bungled unbundling-(21.11.04)

The telecom regulator OFCOM has determined that BT does not need to be broken up in order to allow for proper competition in the telecoms market. Instead it has chosen to regulate individul components of the business, using an equivalence concept. This concept usually means that if a price is available internally between different elements of a business, for instance in BT between the network and retail service to customers, then the same price should be available to external competitors who want to provide a service partially based on the BT network. The theory is that this should allow for competition to be developed on a fair basis.

The problem for this type of regulation is that it requires the regulator to understand the costs and pricing of the incumbent in some detail. It is not apparent that OFCOM has the same detailed and comprehensive information required to do this. The regulator that has the most detailed information about its industry, OFWAT the water regulator, does not collect enough information to require an equivalence concept to be regulated in the way that OFCOM appear to be proposing. It would not appear likely that they currently have the resources to be able to do this.

Predatory pricing is one outcome that may result in no improvements in competition taking place. The incumbent have the incentive to set internal prices that favours those divisions working in areas with more difficult non-price barriers to entry and to have lower than real cost prices in areas that exhibit less natural monopoly characteristics such as the network. The obvious solution would remain breaking up the firm into natural monopoly and contestable markets as seperate entities.