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Essay: The telecommunications market (France)

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This very particular market has been ruled from the beginning by a handful of operators who have been both battling and colluding for years in order to increase either their revenue or the comparative advantages they may have over their competitors. Today, the three major firms on the French market of telecommunications are Orange, SFR and Bouygues Telecom.

Orange, the bigger one the three, was founded 29 years ago, in 1988. Their headquarters are situated in the 15th district of Paris and they recorded 41 billion euros of revenue in 2016. Furthermore, the company is now directed by Stéphane Richard, employs a total of approximately 95,000 people in France and account for 256 million customers worldwide. SFR (Société Française du Radiotéléphone), the elder, was created in 1987 and their headquarters are in Saint-Denis in the suburbs of Paris. Back in 2016, they recorded revenues of 11 billion euros, accounted for 21.9 million customers in France. The company is now run by Patrick Drahi and currently employs 14,500 French people. Finally, Bouygues Telecom was founded in 1994. Their headquarters are in Paris and the company is run by Olivier Roussat. They recorded 4.8 billion euros of revenue in 2016, account for approximately 15 million customers in France and are currently employing 8,000 French workers.

Which factors influenced the creation of the government monopoly at the end of the second World War and how did liberalism introduce the concurrence in the 80s?

During the years following the second World War, the telecom market was a government monopoly. Indeed, France Telecom established a natural monopoly which was closely controlled by the French government. Several elements explain the creation of this monopoly and those reasons are linked to the French government’s functions. In this respect, it is worth mentioning that since the end of the second World War, the state intervention is not limited to its regalian functions anymore but is now also related to the economy especially with the growing number of nationalizations and to the social welfare with the creation of a welfare state.

First of all, we should bear in mind that the French government has several functions including the function of “regalien state”. As it is underlined by the word’s etymology, those functions are related to the king’s actions. In this case they legitimate the state intervention in the army, or the police. The French government used to consider that controlling the telecom market would make the military and police operations easier and that it was a necessity for the internal and external security of the country. Introducing a governmental monopoly was considered as a way to ensure the security on the territory.

         Secondly, let us focus on the economic reasons of this monopoly. France Telecom’s monopoly used to be a natural monopoly. Indeed, the technology required to produce this service enabled France Telecom to meet the entire market demand at a lower price than two or more firms could have. In fact, it is hard to believe that several cables would connect the same individuals since it would be much more expensive and useless. Besides, the fixed costs, that is the cost of installing the network, were so high that they represented a barrier for the entry of other firms in this market.  In fact, for each additional branching realized, the marginal cost decreases. Therefore, the average cost falls as the number of consumers goes up, which means that Telecom was making economies of scale. Those economies of scale enabled the firm to lower its prices and at the same time to increase its margins. A new firm entering this market would have had to cover its fixed costs first, and would have never been able to face France Telecom’s price competitiveness. The incredibly high costs of infrastructures was  one of the reasons why France Telecom was facing no competitors, and that there were no substitutes. As a natural monopoly, this monopoly was controlled by the French government.

     Last but not least, we should bear in mind that the French government has become more willing to ensure its citizens’ welfare after the second World War. In this respect, we must take into account two elements explaining the control of the monopoly by the government. First of all, it is worth mentioning that the access to telecommunication used to be regarded as a public service and therefore every single citizen should have been able to access to this service, hence respecting the equality between them. This is the reason why all French people used to pay the same amount of money to use telecommunication, no matter how far from a telephone switch they lived. Besides, in a monopoly since the firm is facing no competitors, it has a huge market share and an unlimited control over price. In other words, it is price maker. However, a monopoly does not allocate the resources in the most efficient way, so that it can maximize both consumers’ and producers’ surpluses. Indeed, if the market had not been regulated by the government, France Telecom would have maximized profits by choosing the price and output where the difference between total revenue and total cost was the largest. In other words, they would have maximized profit at the output where total revenue exceeded total costs by the greatest amount. The prices would have been extremely high, which would have impaired the consumer. Therefore, creating a governmental monopoly was a way for the government to protect the consumer by controlling the price of telecommunications. In this respect, it is worth mentioning that since the market was controlled by the government, it ensured that every single place in France had a phone and not only the main cities.                                                                                                                                                             

               

     Even though the monopoly was under the control of the French government, this was not the optimal market situation for the society has a whole. Therefore, on January 1rst 1988, the “Direction générale des télécommunications” became France Telecom, a firm facing now competitors in the market.

     The early 80s have been marked by the rise of liberal policies. Indeed, France was part of the western bloc during the cold war – it advocated both economic and political liberalism and had also been influenced by the accession to power of Margaret Thatcher in Great Britain in 1979 and Reagan in the United States in 1980. Besides, the European construction was being deepened during those year especially with the creation of the EU single market through the single act which ensured the free flow of goods, services, capitals and humans between the members countries. In other words, all the tax frontiers and barriers to trade have been removed. However, the market situation of the monopoly does not seem to correspond to the criteria of liberalism. Indeed, we shou
ld bear in mind that liberalist advocate the model of the pure and perfect competition as the best way to allocate resources. Yet this monopoly was questioning some of the criteria of the pure and perfect competition. Firstly, there was no free entry in this market since the government ensured that no other firm could compete in this market. Beside the high fixed cost and the ability to produce economies of scale used to be a huge barrier that enhanced the entrance of competitors in the market. Secondly, there was no atomicity of the market: indeed, since France Telecom used to be the unique supplier, it had the opportunity to control prices. Instead of being “price taker” as it should have been in a perfectly competitive market, it was “price maker”. Therefore, the French government decided to deregulate the telecommunication market by letting new firms, that is competitors, enter.

     If liberal economists advocate the theory of the perfectly competitive market it is also because they consider it as the best way to allocate resources as it is underlined by Adam Smith’s theory of the invisible hand. No governmental agency is needed to induce producers to drop or increase their prices. Supply and demand curves act more or less in unison in a perfectly competitive market and cause the market price to change. And according to Adam Smith’s theory, if everybody tries to maximize its own satisfaction, it will result in an optimal situation for all. Indeed, a competitive market is better for the consumer who can take advantage of the lower prices due to price competitiveness, which will increase its surplus. Products in a competitive market tend also to have a better quality and the consumer will have the ability to choose between very differentiated products since firms also try to develop their structural competitiveness. As far as the firms themselves are concerned, the competition stimulates the innovation and increase both productivity and competitiveness. We should then bear in mind that if the number of supplier’s increases, the price will go down and therefore the demand will increase. Therefore, introducing new firms might boost the national economy.

Besides, we have to take into account another element which has enabled new firms to enter the French telecommunication market. Indeed, with the technological advances is has become much cheaper to install a network. This decrease in the fixed costs has impacted the market structures by removing the barriers at the entry of the market and letting new firms competing

Last but not least we should take other external factors into account to better understand the end of the governmental monopoly. Firstly, the French market has incredibly increased during the second half of the XXth century to reach around 42 million users. Hence, a single company was not able to answer all this demand. Secondly, this also coincides with the disengagement of the French government in the economy which did lead to several privatizations in the 80s and 90s. Indeed, the state did transfer the management of several of its public enterprises.

Now that we have seen all the reasons explaining the introduction of competition in this market, let us study how France Telecom has become a private company and how new competitors have entered the French market of telecommunication.

France Telecom’s privatization has taken sixteen years and has led to conflicts between the Right and the Left. Indeed, this privatization was led by the Right Government and more especially by Alain Juppé and his actions were often questioned by the socialist party. This privatization was an operation that could not fail: indeed, not only were huge amounts of money involved, but this event was also waited by both consumers and investors.  the first of January 1988, in response to the European Union to organize the market as the United States, the administration Direction General des Communications becomes France Telecom. On the second of July 1990, France Telecom becomes a public-law. Therefore, the budget is not determined by the government, which only remain the unique shareholder of the company. In October 1997 France Telecom went public with 21% of its capital placed in the stock exchange. In 1998, only 62% of the capital was owned by the government and has dropped slightly during the following year to reach the point of 53.1%. Hence, France Telecom remains a public corporation. The first January 1998 is market by the introduction of the competition on the market. In December 2003, the government enforced a law allowing itself to own less that 50% of France Telecom’s capital. However, its workers are still considered as public officials. In September 2004, France Telecom officially becomes a private corporation. Even though the government only has 42.25% of France Telecom’s capital it does remain the main shareholder.

Not only has France Telecom been privatized but new competitors have also been allowed to enter the French Market of Telecommunication, the market became  competitive. First of all, from 1992 to 1996 there were two competitors in the market, which was qualified as a duopoly led by two corporations: France Telecom and SFR. As we might expect the prices were incredibly high: one hour of communication costed 60€. In May 1996, Bouygues entered the French market by introducing relatively low prices such as two hours of communication for 40€. In other words, the prices were divided by two. Since 1997, the prices have slightly decreased.

We know that the competitive market is considered as the most optimal way to allocate resources: the client should increase his surplus and benefit for both lower prices and higher quality. And the productive activity should also benefit since companies would improve their productivity and would innovate to become most competitive. But how was the competition after the liberalization of the French Telecommunication market?

First of all, we should bear in mind that the new competitors only represent 20% of the French market of telecommunications, so the market is still dominated by France Telecom.

Besides the situation differs according to the kind of service offered. Regarding the fixed telephony, the competitors have invested huge amounts of money without generating as much cash. Indeed, some of them used France Telecom networks; which therefore still controlled this market. As far as the consumers were concerned, the prices did not really decrease, competitor’s prices were not as attractive as expected and were sometimes higher than France Telecom’s. Regarding the mobile telephony, the market was an oligopoly, that is there were only a few competitors. Therefore, this is not optimal for the consumer since the price increase.

Last but not least we should take into account the economic context at that time. Indeed, those years were marked by a breach of trust in the market. The capitalization of French Telecommunication companies had dropped by 700 billion of dollars in 2002. Therefore, those companies had made social plans. In other words, both companies and employees had suffered from the consequences of the opening to competition.

What is a cartel and how does it apply to the French telecommunication market in the 1990’s and early 2000’s ?

When firms are competing in an oligopoly, they are better off co-operating and acting like a monopoly by producing a small quantity of output and charging a price above marginal cost. Firms make secret agreement about the prices, a geographic share of the market or of the market shares. By doing so they can increase profitability, decrease uncertainty and restrict new entries. Therefore, their market shares are frozen, as well as their margins. In other words, a cartel in a form of oligopoly in which a few number of producers or suppliers control the market.

Producers’ incentive is to protect their self-interests as cartels are created when a few large p
roducers decide to cooperate with respect to certain aspects of their markets. Once a cartel is formed, it can fix prices for members in order to avoid price competition. This is why in that case cartels are called “price rings”. They can as well as influence prices, restrict outputs released onto the market. Setting rules is especially important in oligopolistic markets as it will have a significant impact on prices and production.

By sharing information, firms compete in a “false” competitive market which looks like a monopoly since firms are trying to maximize their common profit. Therefore, prices are set so that the firm’s marginal cost equals their marginal revenue. Even though a cartel should allocate sales to firm so that the marginal cost of all firms is equal, allocation decisions are actually influenced by the political strength and negotiation power of the member firms. If there is a difference in marginal costs, the firms with small marginal costs should produce less units of output and the firms with higher marginal costs should produce more units.

The price and output determination in a cartel is specific. It is worth mentioning that the kind of cartel does influence price and output determination.

First of all, in a cartel type of collusive oligopoly, firms jointly fix a price and output policy through agreements. But under price leadership one firm sets the price and others follow it. The one which sets the price is the price leader and the others who follow it are its followers.

Besides, in a perfect cartel structure, the market is shared among the members of the cartel by a central management authority and profits are merged and distributed among the members according to a prior agreement. In a loose cartel structure, prices are determined differently.

Producers tend to be significantly attracted by cartels since it is a way of setting rules that members will follow strictly in order to maximize profit. However, we must distinguish market-sharing by non-price competition and market-sharing by output quota. Market-sharing- by non-price competition is a uniform set of price and the members are free to produce and sell the amount of outputs that maximize their individual profits while market-sharing by output quota exists if the firms are all producing the same homogenous products with the same costs, the profits will be maximized consequently. However, if costs are different, the quotas need to be fixed through bargaining between cartel’s members.

In 2005, Bouygues Télécom, France Télécom and SFR, the three dominant phone companies within the telecommunication market were condemned for unlawful agreement between 2000 and 2002 to over 534 million of euros of fine. SFR is the French Society of radiotelephone that was created in 1987 and France Telecom is a company created in 1988 after the liberalization of the market in France. Bouygues Télécom is the last company that entered the market in 1997 that was created by Martin Bouygues and is an innovative firm that changed radically the market.

The justice blames the three dominant companies for having illegally distributed the telecommunication market among them in order to get the entire control of prices.

As we found out previously, a cartel is a group of firms that do agree to work together in order to control the entire market shares by controlling the prices. In the French telecommunication market’s case, price is a significant factor of the cartel created between SFR, France Telecom and Orange. Indeed, back in 1992, the first phone plans were launched by France Telecom and SFR within the GSM (Global System for Mobile communications) market. Back to the old days, SFR and Bouygues Telecom were the two dominant companies within the market and they had most of the market shares. The market was indeed a duopolistic market as two companies had most of the market shares.

The prices were fairly high as four hours of communication in France would cost 180 euros on average. If a consumer wanted to call for two hours, he would be charged at least 80 euros and one hour of communication was evaluated at the cost of 60 euros. The prices were very high and as the telecommunication is a market with significant entry barriers, the supply was mostly controlled by the two giant companies SFR and Bouygues Telecom hence the demand was quite inelastic and the companies could fairly rise their prices in case of the seeking for more profit.

Furthermore, in 1997, the company Bouygues Telecom entered the market and created a fierce competition among companies when it came up with more affordable phone plans that increased its competitiveness and attracted more consumers looking for less expensive monthly plan. The company launched a 40€ plan for two hours, half of the price of the old plans in order to create incentives for consumers. Besides, the company came up with a great innovation: the prepaid SIM card that revolutionized the market. With Bouygues Telecom’s arrival, the market structure shifted from a duopolistic market to a competitive market where not only two major companies were leading the prices but also a third one that broke the prices. Consequently, in 1999, 20 million of consumers benefited from a fair access to a mobile phone’s monthly plan. The leading company, France Telecom, had 10 million of consumers while SFR had 7 million of phone subscribers and 3.5 million of consumers had a phone plan from Bouygues Telecom.

In the same year, the Arcep (Authority for Electronic Communication and Posts) was created to ensure the respect of the law within the market and of the rules of competition in order to guarantee to the consumers fair prices and condemn the firms that would not fulfill their engagements. Despite the creation of the Arcep, an institution that addresses specific disputes, the prices are still very high within the market and the market shares are still distributed among the three major companies such as SFR, Orange and Bouygues Telecom.

 The market purely applies to the concept of cartel as the prices remained very high despite the government’s incentive to break up with the oligopolistic structure.

In the telecommunication market’s case, the firms willingly made agreements to work altogether in order to lead the market and control the prices of the phone packagings.

According to an investigation of the General Directorate for Fair Trading, Consumer Affairs and Fraud Control (DGCCRF), the companies clearly made some agreements regarding the market shares and they shared private information concerning their consumers, mobile pricing and market shares. The trial showed evidence of information shared about consumers’ cancellation and  The DGCCRF also revealed a memo from Orange in 2003 that said “Bytel [Bouygues Telecom] has to go back up to 20%”. The three companies denied the accusation of an unlawful cartel but the scandal was taken to court by the association UFC what to choose (UFC que choisir). Orange had to pay 256€ million of sanction, SFR was sanctioned with 220€ million and last but not least, the company France Telecom had to pay 58 million of euros.

The cartel was also used by the firms to agree on the quota of consumers’ cancellations per firm in order to maximize profit. Indeed, the trial revealed that between 1998 and 2003, every year, the number of customers cancelling their mobile plan from either SFR, Orange or Bouygues Telecom consecutively increased. In 1999, 17.40 % of consumers cancelled from Orange against 18.70% in 2003. During the same period, SFR lost 17.60% of consumers in 1998 and 25.60% of consumer in 2003 and Bouygues Telecom lost 13.50% of consumers against 19.40% of consumers in 2003. As Orange, the new name of France Telecom, was the leader of the market, one of the advantages of the cartel’s existence was the maximization of profit for Orange by limiting the loss of consumers while the
number-two company SFR and the last company to enter the market, Bouygues Telecom, shared most of the part of consumers’ cancellation as their profit was proportionally less significant within the market.

Therefore, the firms altogether managed to control the average phone pricing, shared confidential information concerning the consumers and shared consumer cancellations  among the three of them in order to control the market.

 How and why did the government influence the market?

         The discovery of the cartel revealed that the market was imperfectly functioning, leading to a non-optimal allocation of the resources. Indeed, all the consumers have been victimized by this illicit collusion. Therefore the government decided to regulate the market by ending the cartel and introducing new competitors to boost competition in the French telecommunication market.

First of all, let us focus on the economic arguments that have justified the intervention of the government in this market. The French phone services SFR, Bouygues Telecom and Orange were found guilty of establishing a cartel. As previously stated, a cartel is a form of oligopoly in which producers of a good or service establish a formal agreement whose primary vocation is to ensure that the companies in the agreement boost up their profit through various forms of abuse of their power. Cartels use a lot of anticompetitive practices in order to satisfy their individual interests, those include but are not limited to, output restriction in an effort to maintain high profit and boost their profits. Cartels, just like monopolies interfere with the forces of a free markets (like a competitive one) and thus become obstacles to the optimal allocation of resources and price setting.Cartels are not considered as the best way to allocate resources, since they are not respecting the pure and perfect competition. Indeed, in a cartel, prices are higher that the prices in a competitive market and quantities are less important. Contrary to a competitive market, the equilibrium is not a sustainable price. The government intervention is required to regulate the market.

Cartels have a detrimental impact not only on consumers but also on the society as a whole. First of all the cartel is a pattern that affect the consumer negatively through higher prices. The increase of prices has two impacts: first of all, some consumers who are still willing to buy the goods spend higher amounts of money. The surplus of the consumers decreases while the producers’ one increase. Besides, some consumers stop consuming the goods and therefore this is a deadweight loss for the society. Moreover, consumers are weaken if firms create a cartel because of lack of transparency. Indeed, cartel’s members willingly hide prices or withhold information such as credit transactions’ fees. Furthermore, restricting output by putting significant quotas affects consumers as the resources are rarer and more difficult to find onto the market. Last but not least, a cartel may lead to carving up the market. Indeed, the cartel may collectively agree to break up a market into regions or territories such that if a region belongs to one of the members, the other members commit to never compete within the region.

As far as the firms are concerned, competing is a non-competitive environment might be detrimental. Indeed, since they do not fear losing market shares they are not encouraged to innovate or to improve their competitiveness. Besides, since firms frozen their market shares, they do not realize any economies of scale are therefore do not improve their productivity. Effectively, cartels, monopolies or other example of non competitive markets hinder progress because the companies have no incentive to invest in research and development; those companies, already making significant profits and having control on the market, will not seek to find ways to ameliorate the quality of their product. Last but not least, creating a cartel has some cost that the firms have to pay.

Overall, cartels prioritize their interest over those of the society, which is why many countries enforce regulations and laws to stop them altogether. Such is the case in the European Union in which there is the Competition Law, which can be assimilated to the US antitrust law or the Canadian act. The Competition law stipulates that: “All agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market. In some cases, the companies still decide to make secret agreements, thus breaking the law. Therefore, intervention of the government or a legal entity is required. The government can intervene on the market by fining those companies or through attempts of liberation of the market. Following complaints of the Conseil de la Compétition and of the UFC-Que Choisir (“a French consumer group which defends the interests of consumers and protects them against litigations”), respectively in 2002 and in 2001, an investigation was conducted on the three companies in question. Proof was later found that from 1997 to 2003, those three firms had exchanged confidential information regarding their sales, in this case the number of new subscribers and the number of contract termination. Further inquiry revealed that there was solid proof (written agreements and notes) that mentioned that between 2000 to 2002, the companies accepted to harmonize their market shares. The information exchanged and the harmonization of the market gave those companies the ability to charge a unified price that was higher than what was previously charged. More evidence, such as the fact that if any of those companies had individually adopted that price, their sales would plummet, seemed to indicate that there must have been an arrangement of some sort. Upon discovery of these facts, the three companies received a lawsuit which ensued in SFR, Bouygues and Orange formerly known as France Telecom, being fined up to 534 millions of euros by Le Conseil de la Compétition.

On top of enforcing a legal punishment, the government also reacted through an effort of liberalization of the market by authorizing the entry of a new firm, namely “Free mobile” to the telecom market.“Free mobile” was founded on July 24th 2007 by Xavier Niel and it is the fourth French operator to receive a 3G license.  The arrival of Free was highly anticipated and encouraged by the government as it would serve as a way to increase competition on the telecom market and to thus diminish the hold of the SFR, Bouygues Telecom and Orange on the French Telecommunications market. The arrival of this new company, lead to important consequences in the structure of the market.

First off all, introducing Free did decrease prices and expand the market. Free announced prices that were much lower than those charged by the three firms in the Telecom cartel. It introduced packages of unlimited calls, messaging and cellular data for 19.99€ per month and other packages that could even be free for particular users. Needless to say that the prices offered by Free was much lower than those offered by it’s competitors namely Orange, SFR and Bouygues Telecom. Free influenced the market by introducing more competition to it. By implementing its considerably lower prices, it not only gave incentive to more consumers to join the market, which resulted in a expansion of the telecommunications market, it also prompted the firms in the Telecom market to reduce their prices, to retain some of their customers, even though that was not enough to stop the important loss consumers of the three big operators following the entrance of free to the market. According to “L’Express L’expansion”, following the arrival of the fourth operator, Orange suffered a loss 615
.000 clients while SFR and Bouygues Telecom respectively suffered losses of 200,000 and 565,000 clients. The arrival of Free and its low prices not only caused lead to the three companies in the Telecom market to loose their clients, it also forced them to decrease their prices in an effort to retain some of their customers. Free mobile also had an overall positive impact of the French telecom market. As mentioned earlier, by offering inexpensive packages, it made phone services accessible to more people. Free lead to an expansion of the market not only through its pricing but also through its simplified offers which were understandable and adapted readily to the consumers’ needs. Through all of these, Free proved to be true to the mission the government had intended for it; not only did it help break the tendency of overcharging the consumers previously adopted by the Telecom cartels, it also contributed greatly to making phone plans more accessible and thus proved to be serving the society’s interests.

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