Excessive pricing in Nigerian telecoms

How can competition authorities tackle excessive data prices?

Background

Excessive pricing is one of those areas of competition law that raises a lot of questions for enforcers. Some enforcement agencies even exercise regulatory discretion to avoid much enforcement work in this area due to the complexities associated with finding the right balance to justify when the price for a product is excessive.

Business owners have the discretion to prefer a price on their product and if a customer deems the same as excessive, the customer has the option to either refuse to purchase or buy regardless if the customer believes the product is worth its price. Excessive pricing concerns a situation where a dominant undertaking, can reap supra-competitive profits, not being sufficiently challenged by normal forces of competition. Typically, the forces of competition can correct markets when there are excessive prices because a new entrant can come into the market and offer the same product/quality at a cheaper price to consumers, which will attract customers. Because the incumbent wants to retain its share of the market, it also lowers its price or ups its product offering at the same price. This way, the market is balanced out and the market self regulates. This ability for the market to self-correct gets complicated in monopoly markets or markets where few players dominate.

Hence, our focus on the Nigerian telecommunications sector, which is dominated by 4 network providers constantly accused of excessive pricing in the production of mobile telephone services to customers.

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What is the law on excessive pricing in Nigeria?

Section 72 of the Federal Competition and Consumer Protection Act (FCCPC Act or the Act) stipulates that abuse by one or more undertakings in a dominant position is prohibited and further clarifies amongst other instances that an abuse of dominant position occurs where one or more undertakings in a dominant position charge an excessive price to the detriment of consumers.

Further, Part XV of the Act, which is dedicated to consumer rights, emphasizes that an undertaking shall not offer to supply, supply, or enter into an agreement to supply, any goods or services at a price that is manifestly unfair, unreasonable, or unjust or on terms that are unfair, unreasonable, or unjust.

In perspective, and according to the FCCPC Act prices for goods and services must not be (i) excessive; or (ii) unfair, unreasonable, or unjust. What this means is that a price that is excessive but not unfair offends the provisions of the Act. A price that is unfair but not excessive also offends the Act. Both price violation considerations are independent in grounding a claim under the FCCPC Act.

This position is a bit different from that in the EU which stipulates that a price must not be “excessive and unfair.” What this means is that in the EU, there is a two-limb test that must be satisfied to ground a claim for excessive pricing (i) the price must be excessive; and if it is excessive, (ii) must be unfair.

In Nigeria, under the FCCPC Act, it appears that only one test is required which is the excessiveness test. The unfairness is treated separately meaning that in a claim for excessive pricing, there is no need to demonstrate unfairness. In the spirit of the purpose and scope of competition law, I doubt this will be the intention of the Act. Particularly, as the capacity to reap profits is fundamental to the essence of competition law and also, what does it mean for a price to be excessive given the freedom business owners have to put a price on their product and service offerings. Can the act be interpreted to mean that once a price is excessive, it is impliedly unfair? It will be absurd for excessiveness to be the only test as this type of reasoning will open a can of worms that the judiciary will be unable to manage. Until the courts give meaning to the provision, we are at least clear that there is a prohibition against excessive prices and unfair prices even though the FCCPC Act treats both separately.

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Nigerian telecommunications

In the Nigerian telecommunications industry, there are 4 players: MTN, Airtel, Glo, and 9 mobile. These four companies represent the competition in the market, and there is no difference in the price of their products or distinction in tangible service offerings. The market is largely concentrated in the hands of these 4 competitors, and this opens up the market to the possibility of collusion for excessive prices. This type of market structure actively stifles innovation and competition.

MTN, Glo, Airtel, and 9mobile be like …

Many of the characteristics that affect the sustainability of collusion for excessive prices are present in the Nigerian telecommunications market. First, there are only 4 competitors and entry barriers are high. Second, it is unclear whether the market is growing, stagnating, or declining in terms of customer reach and product quality. Third, the market is driven by technology and innovation which demands a more dynamic market however, the current state of technology and innovation reaching customers are somewhat stiff and inaccessible.

These market conditions should raise red flags for the Nigerian competition regulator which should trigger an investigation into the market, particularly given the importance of telecommunications and data on the economy.

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Regulatory response suggestions for excessive prices in Nigerian telecommunications

Investigation / monitoring activities

There are signals as discussed above for a potential finding of excessive pricing as a competition infringement in the Nigerian telecommunications sector and competition agencies must be bold enough to investigate in this regard. Particularly because of the potential finding that telecommunications prices have been exploitative of consumers. Although tests to ascertain whether a price is excessive is complex, more advanced jurisdictions have been able to lay out certain considerations to gauge how excessive a product pricing is.

The first method is based upon a comparison between costs of production and sale prices. The idea is that there should exist a threshold price that guarantees a sufficient margin concerning costs and that above such a threshold the price charged by a dominant firm would be excessive. It will be naïve to think that this type of approach will not be problematic, particularly as the threshold price and the ‘reasonable’ margin over costs would be to a large extent arbitrary, and it is not clear how it should be fixed.

For this type of exercise, assessing the relevant margin costs will be conducted in conjunction with the sector regulator in this regard, the Nigerian Communications Commission. Assessing production costs is a difficult exercise even for sectoral regulators which have a deep knowledge of the industry let alone competition authorities or courts which have a much more imperfect knowledge of the sector.

The headquarters of the Nigerian Communications Commission in Abuja (Facebook / unknown)

In any event, an examination of the costs/price analysis in Nigerian telecommunications is worth a shot for the protection of consumer interests and alleviation of consumer welfare.

A second method to assess excessive pricing by the competition authority will be a comparison between prices charged by the dominant network providers across different markets in which they operate. For instance, MTN, Glo, Airtel, and 9mobile all operate in other African countries. A price comparison of their services in these other countries where they are faced with a different type of competition may be a good indicator as to whether the pricing model in Nigeria is excessive and exploitative of Nigerian consumers.

Breaking down the barriers to entry into the market

Again, this is another area I will expect the Nigerian competition authority to work with the sector regulator for communications in Nigeria. A market structure where there is ease of entry and exit of competitors will not only reduce the price for goods and services due to the ease of customers switching from incumbents to new entrants but also spur innovation in the market that will boost customer welfare.

Breaking barriers to entry will typically involve enabling access to essential facilities in the market and splitting the market into various competitive segments. Identifying the essential facilities will involve understanding the role of mobile network infrastructure, and allowing access to those types of infrastructure that may not be easily reproduced by entrants.

Telecoms masts are an example of infrastructure that cannot easily be reproduced and therefore raise entry barriers (Premium Times / 2020)

Also, this will involve the competition regulator ensuring that terms of access to essential facilities are fair, to avoid situations where prices may not only be exploitative of consumers but also exclusionary in terms of avoiding new entrants coming into the market for the provision of mobile data and network services.

Further, in the absence of entry barriers, any attempt to maintain high-competitive prices would trigger entry (e.g., short-term or “hit-and-run” entry strategies), which would erode the profitability of collusion to sustain excessive prices in the market as it is. Incumbents are then more tempted to undercut collusive prices and the ability to collude thus declines when the likelihood of entry increases.

Innovation makes collusion on prices less easy to sustain. The reason is that innovation, particularly drastic ones, may allow one firm to gain a significant advantage over its rivals. This prospect reduces both the value of future collusion and the amount of harm that rivals will be able to inflict if the need arises. Reducing the barriers to entry must then be an area to drive competition into the market.

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There is of course a lot more to unpack about competition in Nigerian telecommunications. But in the interim and for this post, the above will do. Please look out for the second part to the post.