Figure 1 Telmex and Telcel abuse the lack of competition in the Mexican fixed and mobile phone markets respectively. These “two near-monopolies” control most of the market shares in their corresponding industries. Telmex holds “80% of Mexico’s landlines and about 75 % of [Mexico’s] broad band connections”. Telcel holds “70% of the mobile market”. Although competition does exist in the Mexican markets for fixed and mobile phones, Telmex and Telcel’s market shares are big enough for them to hold monopolistic powers, allowing them to become “price-setters”. This allows both firms to produce profit-maximizing level of output (where the marginal cost curve intersects the marginal revenue curve). By doing so, they do not achieve allocative efficiency, the socially optimal allocation of resources (Qa in figure 1). Due to the price-setting powers these firms hold, both will be analyzed as purely monopolistic firms, implying some degree of uncertainty.
Both Telmex and Telcel fail to produce the socially optimal level of output, therefore causing allocative inefficiency and welfare loss (figure 1). Assuming that Telmex’s and Telcel’s priority is to maximize their profit, it is logical for both companies to produce at Q*. Nevertheless, this point does not occur at the Pareto optimal point, which occurs when supply is equal to demand and which happens to be the allocative efficient level of output, Qa. * By producing at the profit-maximizing level of output Q*, Telmex and Telcel are producing less than what is allocative efficient, or under-producing (Q*<Qa). The firms’ underproduction is what is