Public Affairs - Is Digicel on the mad march to monopoly?

Darron Thomas, Guest Columnist

A news release on Friday, March 11, may form the basis of what could become Digicel's monopolisation of the wireless telephony industry in Jamaica. Anecdotal evidence suggests that LIME, the former monopoly in the industry, has less than 20 per cent market share, and begs the question of its viability as an effective competitor to Digicel.

The giant status that Digicel will enjoy in the wireless telephony industry if it is successful in acquiring Claro's operations in Jamaica by mid-2011 could very well put Digicel in a position to undermine competitive forces in the marketplace. Alternatively, one could pose the question of how effective can LIME be as the countervailing force which will act as the gatekeeper of ensuring maximum consumer welfare.

As with Flow's acquisition of Entertainment Systems Limited (ESL) in 2008, Digicel's acquisition paves the way for dominance in the respective industry. Both acquisitions bring to the fore some of the more important issues that underlie competition policy. On one hand, a dominant position in an industry could allow for dominant firms to abuse any market power that may be accrued as a consequence of sheer size. On the other hand, the improved technology and consequent higher quality of service that size may afford could lead to improved consumer welfare. This improvement could outweigh any loss in consumer welfare because of dominance.

Almost three years on, I am unaware of any studies which have analysed the impact of the Flow acquisitions. However, some cursory evidence is suggestive of the outcome in the Flow situation. Flow has provided increased quality, as evidenced by its upgrading of Internet speeds in recent times. These improved speeds may be due to the 2008 laying of a 'fibre link' which connects the Caribbean to North America and Colombia, and represent a gain for consumers. On the contrary, Flow's customer service, at least until mid-2010, was notoriously disappointing as customers in many instances did not have access to current billing and other information. Furthermore, the customer-service process was generally hazy. Clearly, these issues detract from consumer welfare. To Flow's credit, the introduction of electronic billing, among other features, has improved Flow's customer service, a welcome quality improvement.

Driving prices away

To emphasise the point, note that increased size creates the milieu for driving prices away from the competitive outcome, which is in contravention with maximising consumer welfare. However, larger firms, especially with deep pockets, can afford to expend greater investment outlays to acquire cutting-edge and better, if not the best, technologies to service the market. It will be interesting as we wait to see whether or not LIME or some other entity will file a lawsuit to block the Digicel-Claro proposed merger. Apart from LIME, who would want to block the proposed merger?

In like fashion to Flow's acquisitions, Digicel's proposed acquisition of Claro raises antitrust/competition policy concerns and should attract the attention of the Fair Trading Commission (FTC) and the Office of Utilities Regulation (OUR). The FTC, in particular, has a role to play, as it did in the 2001 case of ESL's claim that Telstar Cable was acting in a predatory fashion to eliminate ESL from the market. In the US, the antitrust regulators, The Antitrust Division of The Department of Justice (DoJ), become concerned when a potential merger threatens the competitive nature of an industry by raising concentration/market-share levels, among other factors, based on preset standards. Note the use of the word 'potential' here. It indicates that even before the merger takes place, the firms must submit to the DoJ to ensure that a position of dominance, which makes them immune to competition, would not be established by any proposed merger.

Of course, Section 19 of the Fair Competition Act (FCA) is meant to deal with issues of this nature, but to the best of my knowledge, the FTC has not spoken loudly on the Flow-ESL merger and is yet to speak on the Digicel-Claro merger. I am also aware that the FTC has standards by which it enforces the stipulations of the FCA, but do these procedures have automatic trigger points that would warrant the FTC's involvement once they are breached? Additionally, must the FTC be notified of all potential mergers before such deals are enacted so that it can proactively assess the impact, or does the FTC simply react to that which has already occurred?

It is my belief that similar standards to those in the US, which would trigger the FTC's automatic involvement, should be established in Jamaica. Moreover, the FTC, on a case-by-case basis, should make a judgment as to whether or not (proposed) mergers adversely affect competition.

Additionally, the question of whether higher quality could be produced at a lower cost must be given consideration in determining if a firm which attempts to monopolise would be more efficient than the status quo.

Such a framework could prevent monopolisation of an industry, but is this necessarily a desirable outcome? There are circumstances in which the answer is no, and on this basis what we need is careful analysis and regulation as may be deemed to be in the best interest of the consumer. Under certain circumstances, which we discuss below, a monopoly should be allowed to operate in an industry as it might be the best practice in the industry. In such an environment, the full force of Section 20 of the FCA, which guards against the abuse of market power, should apply.

Potential impact

Interestingly, the Digicel-Claro merger has been telegraphed, and as a consequence, the FTC now has the opportunity to analyse the potential impact in advance of the culmination of this proposed merger. Such an announcement, de facto, equates the Jamaican regulatory environment to that of the US, with a potential merger up for analysis. The interesting question is, should all potential mergers be brought to the attention of the FTC? The FTC would then determine if the merger would create a dominant firm. Then the question of whether the dominant firm would be immune to the effects of competition must be answered prior to the establishment of the merger. The next step in the process would be to determine whether or not this dominant firm could bring any benefits to consumers in the form of improved quality of products and services. It is on this basis, and only this basis, that the merger should be allowed or disallowed.

Darron Thomas is lecturer in the School of Business Administration at the University of Technology, Jamaica. Email feedback to columns@gleanerjm.com and darron.thomas@gmail.com.