Week 5 on Market Failures

One of the dangers of using words like ‘market failure’ and ‘moral hazard’ is that terms can be bandied about in a quite flippant or fuzzy manner.  Having started to some research into concerns that negative emissions may lead to ‘moral hazard’, it became to me clear that many authors were simply using the term to refer to anything with a ‘moral’ dimension and their concern often had little to do with adverse selection.

I was similarly amused/horrified when I recently read in the FT how the CEO of Telecom Italia was claiming that the poor performance of his firm and European telcos in general was somehow prima facie evidence of ‘market failure’ (meaning, I think, his firm was failing in the market!). His solution is essentially technology, that 5G can help save the industry.  Moreover, the short article describes how Telecom Italia (TIM) paid €2.5 bn for a spectrum auction “designed clearly to enhance revenues for the government”.  The winners of the auction were Telecom Italia and Vodafone outbidding smaller firms Iliad and Wind Tre, which received only smaller stakes.

Telecom Italia, which was privatised in 1997, is a great example of many dimensions of market failure.  After the French firm Vivendi moved to acquire Telecom Italia, the Italian government insisted it would use its ‘golden power’ to ensure state involvement, particularly to safeguard its ‘strategic interests’ in TIM’s submarine network and encrypted software units. This intervention has come at a cost, however.  Moreover, in the face of ongoing concerns over the firm’s governance, the Italian state lending company CDP bought a 5% stake in Telecom Italia “The objective is for CDP to become a stable and long-term financial shareholder… guaranteeing the ‘Italian-ness’ of the company,”

Finally, although TIM already owns the fixed-line network, recent regulatory changes open up the possibility for Telecom Italia to acquire Open Fiber, a wholesale fast-internet network.  In other countries, such as the UK, the pressure has been in the opposite direction, which has been for the main telco to divest network assets such as OpenReach.  This leads to several questions:

Are spectrum auctions desirable? Was it ‘fair’ for the Italian government to raise €6.5 bn in its recent 5G auction?

Should governments intervene to address foreign and/or private control over ‘strategic’ assets? Better yet, what is a ‘strategic asset’?

What should regulators be worried about in terms of market power in mobile telephony?  How should they intervene if they decide there is a problem?