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INTERVIEWS
WITH ECONOMISTS
DR
ROBERT ALBON
Robert Albon is Senior Lecturer in Economics and Director,
Centre for Applied Economics, at The Australian National University.
He has a BEc with Honours from La Trobe University, a DipEd from
Monash University and an MEc and PhD from The Australian National
University. He worked with the Industries Assistance Commission
in 1975, joined The Australian National University in 1976 and
has held visiting positions at institutions including the University
of Birmingham, the Virginia Polytechnic Institute and State University,
the International University of Japan, the Institute of Posts
and Telecommunications Policy in Japan and the Bureau of Transport
and Communications Economics. His research interests lie broadly
in microeconomic analysis, especially as applied to the assessment
and analysis of government policies in various areas including
communications, transport, housing and taxation. He has published
widely in academic and policy journals, monographs and government
papers, including policy monographs on telecommunications and
on the postal industry in both Australia and Britain.
You have undertaken a great deal of research into the communications
industry in Australia. Could you briefly outline your research?
My work on communications has covered various aspects of the structure,
organisation and regulation of telecommunications, postal and
media industries. In particular it has concentrated on the efficiency
analysis of final pricing structures including Australian telecommunications
and Japanese postal pricing. I have also looked at competition
issues, including the important question of pricing competitors’
access to the dominant firm’s ‘essential facilities’,
like Telstra’s local exchange network.
An understanding of costs is a critical element in the examination
of firms. What part has the examination of costs played in your
research work and, in particular, the conclusions you have reached?
Yes, cost structures are vital and often misunderstood. Detailed
information has been difficult to attain. It is often treated
as ‘commercial-in-confidence’ or is simply not available.
Notwithstanding these difficulties, the major conclusions to emerge
in relation to telecommunications costs and prices are these:
First, it is important to focus on the costs of entire service
areas or production elements. This essentially means using a ‘total
service long-run incremental cost’ (TSLRIC) basis for pricing
both final products and rivals’ access. Telephone calls should
not be free-of-charge just because the extra cost now of an additional
call is zero! Second, there can be large differences between the
costs of servicing of peak and off-peak loads, especially in the
form of dedicated capacity to meet the peak. Traditionally the
peak load for local telephone calls occurs in the late morning
and late afternoon on weekdays, but Internet use is producing
a third peak in the early evening. Third, in these industries
there are often substantial ‘common’ or ‘unallocatable’
costs that must be retrieved from pricing. ‘Head office costs’
are a good example.
Some measures of cost, for example marginal cost, while conceptually
simple to determine may, in practice, be very difficult to specify.
Do you think this limits the usefulness of the analysis of costs?
Marginal cost is often — but not always — easy conceptually,
but the difficulties set in when one starts applying it in particular
circumstances. Okay, ‘TSLRIC’ is the appropriate benchmark
for pricing final products and access to production facilities.
But this is only the beginning. Should it be based on the cost
of the actual technology used, best currently available technology,
or forward-looking technology? How is the cost of capital to be
measured in the light of the different costs of equity and debt,
risk factors etc.? How do we handle grey areas between allocatable
and unallocatable costs? Resolution of these important issues
is through the usual process of applied economic research —
replication, refinement and review by one’s peers. In a sense
researchers ‘compete’ with one another to achieve better
results. The stakes are high given the financial importance of
the answers.
The telecommunications industry has undergone a great deal
of analysis and deregulation in recent years. What impact, if
any, do you think this has had on the nature and level of costs
confronting these firms?
Deregulation of telecommunications has put a great deal of pressure
on Telstra to become more cost-efficient overall, and has placed
particular pressure on costs and prices in certain areas. The
legacy of its highly-protected and politicised past is a bloated
cost structure — perhaps 30 per cent above world best practice
— and large imbalances between particular prices and the
underlying costs. Some areas of Telstra’s operations are
more naturally monopolistic; others more naturally competitive
or contestable. Downward pressure on costs has been strongly felt
in areas like long-distance and mobile telephony; less so in local
calls. Government still has strong influence. For example it effectively
bans time-based charging for local calls, forcing Telstra to overinvest
in peak capacity. Further, a cap on residential customer access
charges and other pricing regulations prevent Telstra from adjusting
prices to reflect more closely emerging cost structures.
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