For many years economists told us that sunk costs – such as the amount you pay in a spectrum auction – do not influence consumer prices. But opinions are starting to change…
If you are a landlord and you spend too much on buying a new house, you won’t be able to rent it out for £1000 a month if the same size properties are widely offered for £500 a month.
Faith in the sunk costs hypothesis was particularly shaken by a NERA report for mobile industry association the GSMA which claimed a “significant correlation” between lower spectrum costs and lower consumer data prices in higher income countries.
But an academic paper by Carlo Cambini and Nicola Garelli, published at the same time, also took an empirical approach and found no link between spectrum prices and consumer prices.
Business people and policymakers turn to academics for answers, not “err, maybes,” but here we seem to be in that uncertain territory.
It may not be economically rational for companies to try to recover sunk costs, but people don’t always behave rationally.
Furthermore, one over-spending company may not be able to increase consumer charges, but what if all market players have paid too much?
The arguments will run and run but shouldn’t distract us from a more important point on which there is much broader general agreement.
Maximising revenues for spectrum, whether an explicit policy goal or the consequences of an auction rule, is damaging for society, consumers and industry. If the price is to be determined by market mechanisms, all we can do is make these mechanisms as fair as possible.•