An Empirical Investigation of Cost Subadditivity of the Ethiopian Telecommunications Corporation: Is there a Room for Competition?
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Date
2008-06
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Addis Ababa University
Abstract
A public utility theory argues that industries such as telecommunications, electricity, postal services and water & sewage should be run by a single firm viewed from economic efficiency. This has to do with the existence of various impediments to entry in such market which guarantee the incumbent industry to be a ‘natural monopoly’. The Ethiopian telecommunications corporation in its hundred plus years of operation remains on the hands of the government enjoying an exclusive right in provision of telecoms services in the country. However, the sector performed poor in many standards of quality judged against the threshold for developing countries. Noting inefficiencies of the sector, the government separated activities of operation from regulation in 1999. Notwithstanding the positive moves seen in recent years, the regulatory authority considered the industry for granted as a natural monopoly without any empirical verification. The purpose of the study was to determine whether cost efficiency is the raison detre for the monopoly market structure in Ethiopian telecoms sector. Accordingly, cost function of etc is studied in line with a mutiproduct firm setting so as to test cost subadditivity. Both the traditional and the Evans & Heckman approach proved that the industry has indeed been a natural monopoly and calls for an effective regulation so as to achieve in a competitive outcome.
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Competition Policy And Regulatory Economics