Originally written in the fall of 2014
Telecommunications is essential to the economy. Big networks and cell towers let Canadians and business connect to each other and the globe. Increasingly more Canadians are getting cellular devices, in fact 81 percent of Canadians subscribe to wireless services. Land lines are getting ditched in droves and people are switching to cellular only. Cellular companies provide an essential service, but are the prices too expensive?
Why is my bill so expensive?
There are large numbers of reports and studies that illustrate that Canadians pay more than they should for wireless services. The following is a brief summary of some of the major findings.
An Organization of Economic Co-operation and Development (OECD) report on telecommunications indicates that Canada often ranks in the top ten for most expensive services in the OECD. In the category for low usage (Defined as 30 calls+100 MB of data) costs, Canada is the 25th most expensive, out of 34 countries. When it came to certain data-only plans, Canadian prices were consistently in the top three most expensive for 500 MB, 1GB, and 5GB plans. The same OECD report indicates we ranked at the very bottom when it came to wireless subscribers per 100 inhabitants. Further, the report indicates that Canadian companies make the fourth highest amount of cellular-revenue in the OECD, which is not surprising given the cost Canada pays for their services.
Wall Communications put together a report comparing Canadian usage plans with the US, UK, France, Japan, Italy, and Germany. The methodology compared four different levels of service (based on usage). They found that in every category Canadian prices are higher than the average. Low usage wireless users in Canada suffered the highest price out of all the countries surveyed.
If the previous comparative studies were unconvincing, then consider a report by the Brattle Group that concluded that TELUS and Rogers Communications are “earning above-normal returns on their investments, consistent with the exercise of market power”. These above-normal returns are referred to as “positive” or “excess” economic profits. Market power refers to the fact that because such little competition exists in the Canadian wireless market, these companies can charge more, without worrying about a competitor undercutting them.
A Concentrated Market
The Canadian wireless communications market is firmly controlled by three firms: Bell Group, Rogers, and TELUS. Out of these three carriers Bell Group (or BCE) is the largest based on its market cap of $36 billion . However, Bell is a diverse company and is not just involved in telecommunications; as their ownership of the retail store The Source would indicate. The largest carrier based on subscribers is Rogers Communications with 34 percent of the share. TELUS and Bell Group have 28 percent each, collectively the big three have 90 percent of the subscriber market share. The remaining 10 percent belong to new entrants, like WIND, and small regional carriers like SaskTel.
When so few firms operate in a given market an oligopoly forms, an oligopoly describes a situation where there are few sellers of a good or service, and many buyers. To measure competition in a market, economists calculate a Herfindahl index number (HHI). A lower number (numbers typically below 1,000) indicates increased competition; and a higher number indicates a more concentrated market, thus less competition. The nationwide HHI in Canada for cellular competition is 2,771 . This number empirically indicates a “tight oligopoly” (PIAC, 2014). At the provincial level however, there exists even less competition. For example, Newfoundland and Labour has a HHI of 5,958, which indicates a duopoly, meaning only two companies compete in this area in fact most provinces have only two dominant carriers. Using a HHI, we can see that the Canadian market is poorly limited in choice, and this is why these corporations are able to reap such high profits.
Mending airways: how to fix Canada’s wireless communication market
The most obvious fix would be to increase competition in the Canadian wireless industry. Improving competition often leads to a positive effect, on innovation or price . A report prepared for the Competition Bureau of Canada suggests that the entry of a fourth large carrier would be beneficial for Canadian customers. The conclusion of the report suggests there would be price reductions, and also huge gains in consumer surplus; this surplus is defined as the sum between what a consumer is willing to pay, and what a consumer actually pays.
Attempting to open the market is not new. Spectrum was auctioned off in 2008, but new entrants have yet to gain a significant foothold. New entrants like WIND have been faced by “flanker brands”, these are new brands that are established by the incumbents to directly compete with the new companies.
It is clear from the evidence that consumers are getting the short end of the stick.
CRTC. (2013). Communications Monitoring Report 2013. Retrieved from http://www.crtc.gc.ca/eng/publications/reports/policymonitoring/2013/cmr2013.pdf
CRTC. (2014). Communications Monitoring Report 2013: Telecommunications service industry. CRTC. Retrieved October 24, 2014, from http://www.crtc.gc.ca/eng/publications/reports/policymonitoring/2013/cmr5.htm
Giest, M. (2013). OECD Report Confirms What Canadians Have Long Suspected: Wireless Pricing Among Highest in the World. MichaelGiest.ca. Retrieved October 26, 2014, from http://www.michaelgeist.ca/2013/07/oecd-on-wireless-pricing/
Google Finance. (2014). BCE. Google Finance. Retrieved October 23, 2014, from https://www.google.com/finance?q=NYSE:BCE
Hearle, K. C., Mchenry, G. C., Reitzes, J. D., Verlinda, J., & Bazelon, C. (2014). Canadian Wireless Market Performance and the Potential Effect of an Additional Nationwide Carrier Government of Canada. Retrieved from https://services.crtc.gc.ca/pub/DocWebBroker/OpenDocument.aspx?DMID=2131727
PIAC. (2014). Wireless Service in Canada: Why Canadians Deserve Better. Retrieved from http://www.piac.ca/telecom/piac_releases_backgrounder_wireless_services_in_canada_why_canadians_deserve_better/
Wall Communications. (2014). Price Comparisions of Wireline, Wireless and Internet Services in Canada and with Foreign Jurisdictions. Retrieved from http://www.wallcom.ca/pdfs/price-comp-report_2014update_final_CRTC.pdf