ICASA’s intervention in the cellular market of South Africa.

Abstract:

By evaluating the structure and nature of the cellular market within South Africa, one is able to see why a regulatory body is necessary. It was seen that cellular communications have a positive relationship with economic growth and that this relationship is maintained by means of the regulatory body, namely ICASA.

The availability of cheap telecommunication services are important for the South African economy. This is because South Africa has become dependant on information systems for the facilitation of most economic activities and in turn information systems are dependant on telecommunications for internal operational functions. Telecommunications are important for economic growth. This is why South African legislation provides for a telecommunications regulator, namely the Independent Communications Authority of South Africa (ICASA). If prices of cellular services are regulated then the economy will benefit in the form of economic growth. If the prices are not regulated then cellular operators can raise their prices very high which would have a negative relationship with economic growth.

To understand why the mobile market needs regulation, one needs to understand its structure as well as its nature. The South African mobile market is oligopolistic which means that there are a relatively small amount of companies competing against one another; the services they render and the products they produce are all fairly similar in nature. (PARKIN et. al., 2008: 201-202). The reason for this market structure is that although entrance to this market is possible, it is very hard. This is because of the high capital input required as well legal restrictions such as communication licenses. The price elasticity of demand of the products within the mobile market is relatively inelastic in nature. This is because there are very few substitutes. The substitutes that do exist are not very close to the products offered by the mobile providers.

What we have then is a potentially dangerous situation within the market. “A firm’s goal is to maximize profit”. (PARKIN et. al., 2008: 192). A firm does not care about fairness nor the effect high prices have on consumer’s quality of life. This is why a regulatory body such as ICASA is necessary. The oligopolistic structure of the mobile market means that all firms within the market benefit from not being competitive with each other. The relatively inelastic nature of the market also means that consumers are dependant on the products offered by the mobile providers. Without a regulatory body, mobile providers could raise their prices far higher than they are now and consumers would have no choice but to pay whatever the firms asked. This would ultimately lead to an increase in producer surplus, a decrease in consumer surplus and an overall deadweight loss to society.

Understanding the dynamics behind a market and identifying the potentially dangerous situations that could arise is key to developing policy to manage the problems. On the 10^th of February 2010, ICASA announced that interconnection rates between networks would be cut from R1.25 to 89c per minute effective from the 1^st of March 2010. (MUNDY, 2010: 3). Interconnection rates are the rates that cellular networks charge other cellular networks for terminating calls to their network. The high interconnection rates are blamed for the high cellular costs experiences by consumers as this cost is passed on to consumers. (MUNDY, 2010: 3).

A price ceiling occurs “when the government puts a legal limit on how high the price of a product can be.” (FUNDEMENTAL FINANCE, 2010). This is exactly what ICASA has done to interconnection rates between the cellular networks. The highest possible interconnection rate from the 1st of March will be 89c per minute. According to Roller and Waverman (2001: 12), cellular telephony has a positive relationship with economic growth. What they mean by this is where cellular market penetration rates are high, economic growth rates are comparably higher too. The reason for this positive relationship is because cellular technology reduces transactions costs. The price ceiling that ICASA has imposed on the interconnection rates between cellular providers will actually stimulate economic growth because the quantity demanded or will increase as the decrease in price is passed on to consumers. Economic growth in is the social-interest as everyone benefits from it.

In conclusion, cellular telecommunications are important for the South African economy. The relative inelasticity of demand nature and the oligopolistic structure of the market mean that cellular provider can raise their prices very high if they were able to. This is why South African legislation provides for a market watchdog such as ICASA. The price ceiling imposed on the interconnection rates between cellular networks will significantly reduce the price consumers pay for cellular services. This is good for the South African economy because affordable cellular services directly stimulate the economy positively. Society benefits from economic growth as the general quality of life increases. ICASA is an important organization because they protect both the interests of consumers and cellular providers in the cellular market even if the cellular providers do not know it.

List of references:

· PARKIN, M, POWELL, M, MATTHEW, K, 2008. Economics (7e). Essex, England: Pearson.

· FUNDEMENTAL FINANCE, 2010. Price Ceilings. [Online]. Available: http://economics.fundamentalfinance.com/price-ceiling.php. [Accessed 27 April 2010].

· ROLLER, LH and WAVERMAN, L, 2001. Telecommunications Infrastructure and Economic Development: A Simultaneous Approach. The American Economic Review. 91, 4: 909-923.

· SHAPSHAK, T, 2010. Icasa takes bull by the horns. The Times. 19 April. pp 13.