Lessons from the LIME-Digicel war
Kevin Harriott, Contributor
The social planner desires for the public to enjoy the maximum surplus from participating in any market. In a market economy, however, suppliers have the discretion of selecting the quality and price of their goods and services. The dilemma faced by the social planner is how to direct economic activity such that merchants choose to supply high-quality goods at the most affordable prices.
Many are describing the latest developments in the telecoms sector as the beginning of a price war. While this description may be apt, it would be more instructive to appreciate what is unfolding as potent, demonstrable evidence of the importance of opportunity and incentives in social engineering.
On June 15, telecoms provider LIME introduced its Talk EZ Plan. Under this optional plan, prepaid mobile subscribers complete calls to subscribers on LIME's mobile network for $2.99 per minute and to subscribers on Digicel's mobile network for $6.99 per minute (pro-rated per second used).
Why so long?
Many were left wondering why it has taken LIME this long to make such a move given the fact that, by all accounts, it was being outperformed by Digicel. There have always been adequate incentives for LIME to offer more attractive prices. To appreciate this, one need only observe the disparity in the relative size of the subscriber bases of Digicel and LIME. Data suggest that Digicel's subscriber base currently quadruples that of LIME.
Since larger networks compete with a significant competitive advantage over smaller networks, the so-called network effects, LIME has a profit incentive to grow its subscriber base. The mere incentive to lower calling rates, however, was insufficient to have caused LIME to offer more affordable rates. In addition to incentive, LIME would have required adequate opportunity to offer reduced rates.
LIME has attributed its lower calling rate to the pending reduction in call-termination charges as announced by the Office of Utilities Regulation on June 5. The claim is not without merit, since reduced call-termination charges would reduce LIME's cost of completing cross-network calls. The unfolding of events suggests that the announced reduction in call-termination charges provides LIME with the opportunity to offer lower prices.
On June 22, Digicel responded with 'Jamaica's Sweetest Plan'. Under this plan, prepaid subscribers could complete calls to subscribers on Digicel's mobile network for $2.89 per minute and to subscribers on LIME's mobile network for $6.99 per minute (or part thereof).
Opportunity and incentive
To the extent that the public is unaware of any significant reduction in Digicel's cost of providing cellphone services in Jamaica, we can conclude that Digicel had the opportunity to reduce its calling rates prior to LIME's introduction of Talk EZ. In other words, the mere opportunity to lower calling rates was insufficient to have caused Digicel to offer more affordable rates.
In addition to opportunity, Digicel would have required adequate incentives to offer reduced rates. The unfolding of events suggests that subscribers' response to LIME's Talk EZ plan provided Digicel with adequate incentives to roll out its Jamaica's Sweetest Plan.
The debate continues as to whether these plans represent a net improvement to consumer welfare since subscribers to the latest plans would have to forgo some of the benefits from pre-existing plans. Subscribers, the ultimate arbiters, will no doubt carefully review the terms and conditions under which these latest plans are being offered before deciding which offer to accept, if any.
This demonstrates that for consumers to benefit from participating in any market, suppliers must be given both the opportunity and incentives to offer high-quality services at the most affordable prices.