Before the development of effective competition (e.g. state owned monopoly operators) the regulatory concern is that prices will be set substantially above cost so that the operator earns a monopoly level of profit. Wholesale prices are not relevant because there is no competition. With monopoly, the regulatory focus is on regulating retail prices to get the outcome one would expect if the market was competitive.
When regulating either access or retail prices (or both), regulators observe the principles of economic efficiency because that leads to the outcomes we expect in a competitive market.
But regulators are expected to target not only economic efficiency objectives but also politically determined social equity objectives which may include:
· Managing tariff rebalancing: An important outcome in the transition from monopoly to competition is the elimination of cross-subsidies through tariff rebalancing. Competition erodes cross-subsidies and incumbents would like to expedite this process by increasing unprofitable (subsidised) retail access prices in order to lower profitable long-distance call prices. But sudden tariff rebalancing is politically unacceptable. So, price caps, geographical averaging or other similar schemes may be introduced to manage the impact of the necessary rebalancing and to ensure that rebalancing does not undermine the affordability of telephone services.
Whatever the benefits from subsidizing access prices, economists agree that rebalancing tariffs can produce significant economic gains. Tariff rebalancing meets economic efficiency objectives and can improve social welfare by stimulating demand for services such as long distance calling. Rebalanced prices provide improved signals to actual and potential service providers to invest in network access technologies and improve incentives for competitors to compete for a broad range of customers.
· Maintaining geographically uniform prices: It costs more to provide services in rural areas than in urban areas but for political reasons it may be necessary to insist that customers pay the same in any area. This social policy presents a clear conflict with economic efficiency principles. Retail price regulations may require this policy to be observed by the incumbent. Regulators setting cost-based prices may be tempted to set de-average wholesale prices which would pose problems for the incumbent (see Box 4.1);
· Affordability: the traditional monopoly policy of cross-subsidising access from calls helped increase take-up of fixed services . The fear that fixed services might become less affordable after tariff rebalancing has been mitigated by the rapid adoption of mobile services. Now the fear is that fixed broadband services may not be affordable after spending millions of dollars replacing copper with fibre.
Since cross-subsidy is no longer viable, policy-makers need to find other instruments to ensure affordability. These could include direct subsidies to disadvantaged users or to operators (after competitive tenders) to fund roll-out .
Where there is competition, the regulatory focus is on access pricing leaving to market forces driving retail prices – with two exceptions.
· First, there may be some politically mandated pricing constraints, for the reasons just mentioned. The regulator should be given directions by policy-makers for pricing that supports social objectives. Otherwise, the regulator should be guided by economic efficiency principles.
· Second, the incumbent may seek to use its market position to frustrate competition. The ways in which this may occur and how the regulator can remedy such behaviour are discussed in the section on controlling anti-competitive conduct .
Any other interventions to regulate retail specific prices are likely to distort markets.
Box 7.1: Australia Forbears Regulating Pass-Through
In markets with large fixed networks, there is sometime pressure on regulators to ensure that reductions in mobile termination rates are passed through to reductions in the retail prices paid by fixed customers to call mobile networks. This pressure is resisted.
For example, the Australian regulator was asked to mandate such pass-through in its ‘access determination’ for mobile termination. It has refused because it limits how fixed operators use the savings to pass on benefits.
Worse, in the Australian context where the ‘access determination’ is only used to avoid disputes, the existence of a mandatory pass-through requirement may incent fixed and mobile operators to settle on mobile termination rates that are higher than the access determination because a commercial agreement means the pass-through mechanism is not triggered.
And, even if there is a pass-through requirement is triggered, it could be circumvented by fixed line operators raising the pricing of other fixed line bundled services.
Source: ACCC Inquiry to make a final access determination for the Domestic Mobile Terminating Access Service (MTAS) - Access Determination Explanatory Statement, 7 December 2011
 This was also true of mobiles where access (the SIM card and calls were joint in supply and demand. Just as call/carrier selection broke the nexus between access and calls in the fixed network (and the viability of cross-subsidy), voice and SMS apps on mobiles are undermining traditional mobiles business models.
 Another possibility is to use licence condition to require pricing plans to assist low-income consumers to access telecommunications.
 Among the retail pricing issues considered under chapter on anti-competitive conduct are the vertical price squeeze, cross-subsidisation, predatory pricing and tying/bundling.