Are there other factors than the cost of interconnection that needs to be considered by a telecoms regulator?

[Response by Eric P. Chiang, May 2009]

In addition to the level of interconnection, telecoms regulator need to consider quality standards for interconnection services. Quality issues arise in interconnection in two aspects:

  • Is the quality of service provided by an incumbent to an interconnecting entrant the same as to its own retail customers?
  • Is the overall level of quality consistent with that of increasing competition; would some customers sacrifice quality for lower prices, sparking a “race to the bottom” for quality?

Incumbent operators are generally reluctant to interconnect with entrants. If they must, they often seek to deny or delay interconnection, charge high interconnection fees, and/or provide less quality of service relative to its own retail customers (Laffont and Tirole, 2000). Although regulatory policies are often in place to ensure quality with interconnection, it cannot be ignored that incumbents may have an incentive to provide low quality to competing operators.

Note, however, that ensuring equal quality of essential inputs for incumbent and entrants may not adequately address discrimination concerns. There may be situations where an entrant uses an essential input in greater quantities than does the incumbent, so low quality hurts the entrant more than the incumbent. This might happen, for example, with some number portability technologies that provide the entrant with number access that is different than the access afforded the incumbent. Regulators will need to ask themselves who needs the input and how the input quality affects final goods before concluding that equal quality is sufficient for addressing discrimination concerns.

Also, sometimes concern is expressed that the overall level of quality that prevails may fall with competition as customers willingly sacrifice quality for lower prices, creating a market of lower-quality services. An example would be VoIP services, which generally offer lower (though improving) quality at very low prices. However, if the market is competitive and customers are able to make choices, customers can choose the technical approaches that provide them with the best combination of price and quality, which especially for some poor customers may be a lower quality (Baker and Tremolet, 2000). Yet, as the quality of internet communications continues to improve, traditional operators are now adopting the technologies themselves. Many economists also argue that costumers self-select into the quality category they prefer or that is most affordable to them, and thus the offer of services of varying quality increases the market. Finally if operators offer multiple price-quality combinations, this would generally expand the market because different types of customers are able to find specific service offerings that best fit their preferences, encouraging these customers to expand their purchasing.



Regulating Quality
Note no. 221 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, October 2000.
Baker, Bill and Sophie Trémolet

Competition in Telecommunications
Cambridge, MA: MIT Press.
Laffont, Jean-Jacques, and Jean Tirole