TELECOMMUNICATIONS PRICING IN SINGAPORE

Abstract

The topic of telecommunications pricing has been catching more attention since the conversion of the old charging system into a measured one from 1 December 1991. The exercise here is mainly concerned with the pricing theory of Telecoms and why the present system is chosen over the old one. Due to the lack of data in the local context, most of the studies examined here are American based but basically, the same theoretical framework applies and we can examine the pros and cons of the alternative systems. We consider two-part tariff and peak-load pricing as alternatives of flat-rate pricing. Note that Telecoms has employed both two-part pricing and peak-load pricing which are actually good complements of each other. A two-part tariff consists of two parts, that is the fixed access charge and the variable charge which is proportionate to the volume of calling the subscriber undertakes each month. The access charge is for the availability of the telephone service and the variable charge is on a per block basis. Peak-load pricing is to charge subscribers more during peak hours when the demand for usage of the network is greatest and charge less during hours when there is lower demand. It is built on the two-part tariff and is an enhancement over the two-part tariff alone as it ensures a better and more efficient utilisation of the network. If flat-rate pricing were to be continued, the network capacity would definitely have to increase with increasing demands on the system. This would mean that the flat rate charged will have to increase over time which will not benefit a majority of the users. Thus, there will be a more efficient utilisation of capacity under the new system. The decision to charge on the basis of usage also addresses the problem of equity. Under the flat rate charging system, the majority of the subscribers will be subsidizing the minority group of people who place increasing demand on the network, for example, connecting the telephone to the facsimile machine and to MODEMs. The low-usage group will be greatly disadvantaged and with rising costs, they might even choose not to own a telephone. Thus, the change to two-part tariff with peak-load pricing appears to solve both the problems of efficiency and equity. However, Wenders argues that the fully measured service is not optimal and there should not be charges for calls made in the off-peak period. Therefore it is doubtful whether the present system is actually optimal. Since the demand for calls is actually less than supply during the off-peak hours, there is really no reason why consumers should be charged on a per-block basis. Instead, they should be charged a minimal flat rate. Following the privatisation of Singapore Telecoms, there will be a possibility of the company maximising profits to a level that might do more harm than good. For instance, it could sacrifice quality for quantity since it enjoys a monopoly over telecommunications in Singapore. Therefore, we also study the problem of regulation of the company. There are two ways of regulating the utility, namely, rate-of-return regulation and price capping. Price capping is preferable to the rate-of-return regulation as it encourages more cost-cutting investments while the rate-of-return regulation encourages the regulated firm to have excess capacity in order to generate more profits. This exercise tries to examine the various kinds of pricing and regulation and state its stand with regards to them. The studies examined however are not comprehensive as they are not locally based. Thus, if the coming privatisation of Telecoms could reveal more information like cost structures and pricing theory, more comprehensive studies could be done in this area.