In economics, the ideal of efficient pricing is often held up as a desirable social goal. Only efficient pricing can ensure that consumers pay the true economic value of products they buy, and that society’s scarce resources find their best possible uses.
The following are two general principles pertaining to efficient pricing:
- The economically efficient price of any increment of service is the price that exactly recovers the full economic cost that will be incurred to provide that increment of service, and
- In a perfectly competitive market, the price of any increment of service will be driven to the full economic cost of that increment of service, and will therefore be economically efficient.
Unfortunately, in practice, perfect competition very rarely (if ever) occurs. Telecommunications markets are very different from a hypothetical perfectly competitive market, as Table 1 illustrates.
This means that, even where there is strong market competition, certain industries cannot follow the simple pricing rules based on the perfect competition model. When pricing services are provided by network operators, an alternative set of pricing principles apply. These are described here.
In telecommunications, efficient prices typically consist of:
- Recovery of the variable costs of the product, plus
- Mark-ups to recover the product’s fixed costs, and any shared or common costs.
Table 1: Contrast Between Hypothetical Perfectly Competitive Firm and Real World Telecommunications Operators
| Perfectly Competitive Firm | Real World Telecommunications Operator |
| Single service | Multiple services |
| Undifferentiated service provided by all competitors | Service differentiated by competitor (branding, different pricing plans, packaging, customer service plans, and so on) |
| Large number of competitors. Each competitor has negligible market share and no control over price | Fewer competitors, subject to different degrees of regulation and market forces. Market shares may not be negligible |
| No economies of scale or scope | Economies of scale and scope prevalent. High fixed costs, often high sunk costs |
| No regulation, no franchise obligations | Varying degrees or terms of regulation. Franchise obligations common (universal service, carrier of last resort, below-cost pricing of local service) |
| No restrictions on capital. Depreciation determined purely by technological and economic conditions (including risk) | Depreciation rates and cost of capital often below economic levels (subject to regulatory approval) and may not reflect prospective market risks |
| Undifferentiated and perfectly informed customers | Customer base with widely varying demand and usage characteristics |
RELATED INFORMATION
Perfect Competition
Economic and Accounting Measures of Cost
Pricing Principles for the ICT Sector