Discussion Papers

Brigitte Bauer

Quality and Quality Regulation of Reserved Telecommunications Services
Nr. 75 / Dezember 1991

Summary

Telecommunications policy in most industrialized countries has moved towards a break-up of the former monopolistic market structures by opening the respective markets to competition. So far, however, only a few countries have permitted full competition including voice telephony and the provision of the physical network infrastructure. Therefore, the regulation of monopoly services will stay an important issue in many countries. While the regulatory discussion in most cases focuses on the right way of regulating prices, the concern of this paper is what one could call the reverse side of the pricing issue, namely the regulatory approach to quality.

The paper takes up two main questions with respect to quality issues' relevance for monopoly regulation: First, whether it is reasonable to assume that an unregulated monopolist does not offer the quality that meets customers' preferences best and, second, whether regulation can offer applicable solutions in cases where customers are offered an inappropriate quality. With regard to the first question it is shown that there is strong evidence for the assumption that statutory monopolies deviate from the quality levels and mixes which would be offered in a competitive market environment. With regard to the second question it is pointed out that regulators face severe problems when trying to identify and eliminate quality problems. In order to ensure qualitative efficiency in the area of monopoly services, regulators have to measure the development of quality over time, evaluate the wide range of dimensions of quality in terms of some objective function, and develop incentive mechanisms for encouraging appropriate levels and mixes of service quality. This seems relatively easy to handle as long as one deals with an environment of more or less homogeneous demand, no substantial technological changes, and a single quality dimension which is easily to measure. Considerable complexity is, however, introduced when one considers an environment with multi-dimensional quality, rapid technological changes, and heterogeneous demand characteristics.

It is therefore concluded that regulators' chances to succeed in ensuring qualitative efficiency in monopoly markets are to rate low, and that, with the regulatory tools available, no more than the ensurance of certain basic quality levels seems affordable.

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