Essential facilities, cooperation among competitors and nuclear fuel

Finland currently has two producers of nuclear power: Fortum and TVO. These two companies have formed a joint venture, Posiva to take care of their spent nuclear fuel. Having this done through a joint facility may seem to be in the public interest, as you would want the handling to be done as well as possible.

However, whether this joint venture solution really is in the public interest is called into question with the potential entry of a third nuclear power producer, Fennovoima. Posiva claims that their facility doesn't have room for Fennovoima’s spent fuel. This means that Fennovoima would be forced to make a rather large investment in an own facility in order to start their own nuclear power plant. This puts Fennovoima at a disadvantage compared to the other (nuclear) power companies. It could potentially also deter Fennovoima from entering the market, if the investment in an own facility would be too expensive.

Why is this troublesome? Doesn't Posiva and its owners TVO and Fortum have the right to decide how their facility is used? This might seem a reasonable assumption. However, having two competing companies (TVO and Fortum) form a joint venture to reduce their own costs, while excluding new potential entrants to the market is clearly problematic.

The reduction in costs that the joint venture (or to use another term: collusion) achieves is largely a reduction in fixed, not variable costs of power production for TVO and Fortum. This means that the cost savings that are achieved will not be very well reflected in prices. Thus the benefits will mainly accrue to the owners of the companies, rather than the customers. Additionally, if they manage to exclude Fennovoima, the effect will be that prices will be higher, to the detriment of consumers.

There are a lot of precedents for forcing owners of so called essential facilities to give other actors on the market access to these. One example is the phone network, where local phone companies must rent access to the “last mile” to competitors to allow these to sell broadband access. Enforcing similar policy on Posiva might be sensible. 

If this is not possible, the seemingly rational decision to let Fortum and TVO build a joint facility may not be that good from an economics point of view, if it leads to increased concentration of suppliers. And once Fortum and TVO has learned to collude cooperate in the realm of spent nuclear fuel, there might be fertile ground for cooperating on other issues as well…

Lobbying for restrictions on competition

Lobbying for restrictions on competition is a really simple phenomenon. It is a bit depressing that journalists reporting on various commerce associations' initiatives for "improving" the workings of the market. Currently, parliamentarians are concerned that instant/quick loans are offered at outrageous terms, in particular that the associated costs are very high. See the article in English at Helsingin Sanomat's website here.

The association of instant loan companies is of opposed to the proposed measures. However, they have a most "helpful" suggestion. They suggest that making instant loans should be a business subject to more regulation and licensing. Today, outrageously enough, anyone can start a instant loan company. This requirement of licensing would of course be in the interest of consumer protection, as the licensing would ensure that only "serious" companies engage in this business.

On the surface, this may sound sensible. But even the slightest scratching of the surface unveils a more plausible reason for the lobbying. Introducing licensing requirements increases the barriers to entry to the market. This reduces competition in the market, increasing profits. The currently active companies are likely to be in a good position to get licensed, as they already know the industry. Apparently they are also good at organizing themselves for lobbying for their industry, which might make it easier to ensure favorable regulation.

In defense of telesales

Yesterday's papers reported on a new initiative by the Finnish consumer protection agency, proposing outlawing telesales, unless the individual consumer has given express permission to the salesorganization targeting him. Clearly, many individuals are annoyed at receiving aggressive telesales phone calls, so these people might be happy about this kind of law. However, these kind of benefits typically come with costs attached, costs which aren't often immediately detected by everybody.

The largest daily newspaper Helsingin Sanomat noted yesterday that outlawing/restricting telesales would dent the circulations of papers and magazines, as these rely heavily on telesales. While Sanoma Magazines, who publishes many magazines in Finland may have reason to worry about the proposed law cutting down their circulations, the affect on them would not be all bad.

Worst hit by the law would be potential entrant into the magazine business, or any business for that matter. For while the encumbents, like Sanoma Magazines may find attracting new customers more difficult, they will still have their current customer base. New, potential entrants on the other hand will not have the option of using the, presumably highly cost effective telesales device for attracting customers. This will likely lead to some potential entrants finding entry to the market too costly, with them as a result deciding not to enter.

Outlawing, or severely restricting a cost effective way of reaching potential new customers essentially amounts to increasing the barriers of entry into a market. Increasing the barriers to entry means that the encumbents, those currently in the market will face less competition. This will make serving the market will be more profitable for the encumbents. Here it is of course necessary for the encumbents to be able to keep their hold of their current customer base. Nevertheless, maintaining a customer relationship is always easier than creating a new. 

So who will at the end of the day suffer from this proposed restriction? Encumbents in any market where telesales is a cost effective way of signing up new customers will face the cost imposed by more expensive signing up of new customers. On the other hand, they will face less competition. Potential entrants only face the cost. Consumers, those who are supposedly protected by the law will have to deal with firms facing less competition. This in general leads to higher prices, less variety and potentially worse quality.

So what would the policy recommendation of this post be: Just don't do it. Those individuals who are annoyed at receiving telesales phone calls can sign up to the Don't call registry. Anecdotal evidence suggests it is highly effective. Then let those who are not as annoyed continue receiving offers for magazine subscriptions, boxers, mobile phones, etc. over the phone, at the same time ensuring a decent level of competition in these markets.

Economics of customer poaching

Some more reflections on my previous post on changing operators. As someone who’s worked with sales and marketing, it first struck me as a bit odd that my old operator would be lame enough only to send me a SMS when trying to keep from switching to their competitor. Then I remembered that the operators had met at the Ministry of Transports and Communications to deal with problems related to “too aggressive” telemarketing in selling mobile phone subscriptions. They managed to get the minister to start the process of changing the law so as to outlaw telemarketing of  mobile phone subscription (see the press release in Finnish here).

And so if the operators agreed not to actively sell subscriptions by calling customers, then a handy way of sidelining this is to send a SMS to the customer, and encourage him to call you.

The economics of this issue are related to customer poaching and how it can increase the competitive pressures in the market, ie. lead to lower profits for the operators.

If you in effect can manage to get the state to outlaw aggressive poaching practices, then you can increase profitability. Given that you are more or less happy with the amount of customers you have, then by agreeing with your competitors not to pursue their customers too aggressively, while getting them to reciprocate, you can increase your profits. The problem in a normal competitive situation is of course that after entering into an agreement like this you will have an incentive to deviate – Get your competitors to play nice with you, while you plan not so nice with them will be a winning strategy.

With everybody knowing this we have a prisoner’s dilemma, ie. the operators know it’s in their private interest not to honor the agreement, even though everybody would be better of with everybody honoring the agreement as, compared to nobody honoring the agreement. One way of avoiding this unpleasant outcome is to get some additional credibility to your promise not to be aggressive – ask the state to draft an appropriate law banning the aggressive behavior. For the incumbent operators this has the additional benefit of making entry by new actors harder. Homerun!