For decades, the Single Market has been the main driver of growth and economic convergence in the European Union (EU), boosting productivity, economic integration and citizen welfare. However, this cycle of dynamism is showing signs of stagnation. The EU is currently facing a structural problem of low growth, loss of competitiveness and technological backwardness compared to leading economies.
Towards a regulatory framework that prioritises the dynamic efficiency of markets
In this context, Telefónica presents the Policy Brief “Dynamic efficiency: the key to investment and innovation”. Download it here.
Returning to a path of sustained growth requires from the EU a new public policy agenda geared towards the dynamic efficiency of the markets. This is understood as the ability of markets to generate innovation, attract investment and adapt to the technological transformations that determine economic progress and long-term well-being.
However, both sectoral regulatory frameworks and the current application of competition policy, often focused on consumer price as the sole indicator of welfare, may prove insufficient and even counterproductive for that purpose. This approach, based on static efficiency, risks overlooking strategic considerations that, in the long term, would generate greater welfare through more innovative, efficient and competitive services, backed by stronger companies and tailored to the needs and preferences of Europeans.
In this document, Telefónica analyses, on the one hand, the economic theory of competition. It, shows how the authorities’ specific vision leads the market to behave in a certain way, guided by regulatory and competition law decisions. If the ideal market is considered to be one in which competition is based solely on price, market participants will progressively reorient their strategy towards this competitive variable, abandoning desirable aspects for society, such as innovation or investment.
Conversely, if a dynamic efficiency model for competition is chosen, the functioning of the market will be guided by the competitive parameters demanded by society at any given time, always backed by the necessary innovations and investments.
Empirical evidence on dynamic efficiency
The empirical evidence presented in the document corroborates the theoretical analysis. Even seemingly commoditised markets can flourish in terms of variety and value creation for individuals if they operate in an environment of dynamic efficiency. The results shown for the bakery sector are compelling.
The same can be seen in the telecommunications market, where greater sophistication than in the bread market suggests an even greater potential for value creation, as historical analyses of mobile and Internet services have shown.
More recently, the same pattern has been observed in several countries where mergers have been authorised based on dynamic efficiency criteria. Specifically, the document provides evidence of dynamic efficiency following the consolidation of the telecoms markets in India (2020), Brazil (2022), the United States (2020), Taiwan (2023) and even in Europe, in the Netherlands (2018). Also in Europe, there is the “miracle” of rollout of optical fibre in Spain, facilitated by a regulation which allowed access to the incumbent’s network only for bandwidths below 30 Mbps, thus encouraging all operators to compete on merit rather than relying on the regulated access.
The results are clear. For example, India now has one of the world’s fastest standalone 5G deployments; Brazil is among the top five countries with the best mobile network quality; the United States has one of the highest investment per capita in telecommunications networks; Taiwan‘s consolidation has ushered in an new era of “value-based competition”, strengthening its industrial competitiveness; the Netherlands is the EU leader in the deployment of advanced 5G (3.4-3.8 GHz); and Spain has the third highest fibre broadband penetration around the world.
Dynamic efficiency of markets as an enabler of industrial strategy
Evidence shows that when authorities focus on the dynamic efficiency of markets, the benefits for consumers and society multiply in all relevant dimensions: investment grows, quality increases, innovative products appear, and even product prices fall as they are displaced by others more in line with consumer preferences.
However, the benefits of this approach extend beyond wealth creation. In the current context of redefining the EU’s political objectives with a focus on aspects such as security, resilience, competitiveness and sustainability, dynamically efficient markets are essential. This is highlighted by various authors, who argue that competitive markets are essential for achieving political objectives. Again, the empirical evidence analysed for United States and Taiwan shows it to be the case.
Recommendations for boosting dynamic efficiency in the telecommunications sector
This leads Telefónica to conclude that the EU should prioritise a dynamic efficiency approach in both its competition policy and in the various sectoral regulations, in order to encourage investment and innovation. This paradigm shift should have the following shape:
- In the area of horizontal mergers, take into account the dynamic efficiency of the market in all phases of the analysis of the operation, which in turn requires an in-depth analysis of the structure of production (supply side) of the affected sector.
- In terms of sectoral market regulation, conduct an impact analysis of the proposed measures on the dynamic efficiency of the market, in order to avoid the artificial creation of competitors and prevent possible negative effects on investment and innovation.
Download it here.
