The telecommunications sector is characterised by substantial fixed costs and significant economies of scale. In a macrostate this usually does not matter because the main operators function at a point well above minimum efficient scale. But in a typical island state in the Caribbean the main operators usually operate at a point well below minimum efficient scale.
Minimum efficient scale impacts the telecommunications market of the Caribbean in two main ways:
- costs and prices (whether retail or wholesale) are likely to be significantly higher than those observed in macrostates; and
- the unit costs of supplying telecommunications infrastructure rise substantially as the number of competing operators increases and the scale at which each supplies services shrinks.
The impact of minimum efficient scale on the way a telecommunications market functions has important implications for how the market should be regulated in microstates. Specifically, regulators must recognise that efficient prices will be higher in a typical microstate, and that regulation cannot rely as heavily on competitive forces (as competition is likely to be more limited in a microstate).
In addition, the costs of developing, implementing and enforcing regulation varies relatively little with the size of the market being regulated while the benefits are typically proportionate to the size of the market.
Given these differences in the way costs and benefits vary with market size it is possible that regulatory approaches and remedies which are appropriate in macrostates lead to economic losses in microstates.