# Potential impact of a new entrant on retail prices in Djibouti

While there is a broad consensus that regulatory reform in telecommunications is beneficial for businesses and individual consumers, it is very difficult to assess _ex ante_ the evolution of the performance of the sector with expected changes in firm ownership, regulatory framework, and market structure (especially with the introduction of a second operator in a monopolistic market). Boylaud and Nicoletti (2001) conducted a study on OECD countries<sup>10</sup> and concluded that the gains in the reduction of mobile prices were linked to the number of competitors (proxied by the share of new entrants or by the number of competitors), the market shares of the competitors, the prospect of competition (as proxied by the number of years remaining before liberalisation), the specificities of the national markets, and other factors (effect of ownership, economic structure, technology and price rebalancing).

In 2002, the European Commission released a report<sup>11</sup> on the dynamics of the telecommunications sector in the European Union after the market liberalization. Findings suggest that new entrants usually do charge less than incumbent operators,<sup>12</sup> leading to a positive impact on consumers. On the other hand, it is not clear the extent to which other changes such as potential reductions in quality of service (e.g. such as a lower national mobile coverage or a lower quality of customer care) affect the overall benefits of consumers.

More recent studies have focused on the effect of market concentration on retail prices. For example, Genakos et al. (2015) focused on the link between measures of market concentration and prices paid by end users in mature OECD markets. They conclude that one additional competitor is associated to a price reduction of approximately 8.6 percent (ranging from 7.9 percent to 15.9 percent depending on numerous factors). At the same time, the authors caution that impacts from entry and mergers of different firm sizes could not be reliably established. A study<sup>13</sup> published by the British regulator Ofcom in 2016 contains a cross-country econometric analysis of the effects of the number of mobile networks on prices, and the effects of “disruptive” entry<sup>14</sup> in mature OECD markets. It finds that an increase in the number of mobile networks reduces prices by 7.3 percent to 9.2 percent. It also finds that where a disruptive player is present, prices are lower by 10.7 to 12.4 percent. This brings the total effect of disruptive new entry to 17.2 to 20.5 percent.

Even though the introduction of a new mobile entrant will surely have an impact on the performance of the sector and potentially significantly decrease retail prices, it is difficult to

> 10 Olivier Boylaud and Giuseppe Nicoletti, Regulation, Market Structure and Performance in Telecommunications, OECD Economic Studies No. 32, 2001/I. Quotes come from the “Conclusions” section in p.133.

> 11 European Commission, Eighth Report from the Commission on the Implementation of the Telecommunications Regulatory Package, 3/12/2002 COM (2002) 695 final, SEC (2002) 1329. Quote comes from section “3.5.7. New entrants” on p.15.

> 12 For national calls, the study finds that operators charged up to 56% less in the United Kingdom, 46% less in France and 35% less in Germany.

> 13 Ofcom, A cross-country econometric analysis of the effect of disruptive firms on mobile pricing, March 2016. 14 A disruptive player is defined by Ofcom as a player that presents the following behavior: (i) introduction of new innovative services which supersede others; (ii) introduction of new production technologies that increases efficiency for existing services; and (iii) aggressive behavior where the player competes vigorously and prioritizes gaining market share above other considerations such as profits or cost recovery in the short or even medium term.

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