IB Internal Assessment - Essay Example

of extract: Kenya: CCK Says Safaricom 'Arm-Twisting' It at Consumers' Expense Source of extract: http allafrica.com Date of extract: 16th November 2011 Word count of the commentary: 744 Date the commentary was written: 29th December 2011 Section(s) of the syllabus: Microeconomics Commentary Safaricom, Airtel Kenya, Orange Telkom and Essar Telecom are the only mobile phone operators in Kenya. Safaricom’s market share in mobile network subscribers is almost 70% followed by Airtel Kenya, Orange Telkom and Essar Telecom which have their share being 15 % , 9% and 6% respectively (Nyabiage b).

The telecommunication industry in which they operate is regulated by the Communication Commission of Kenya (CCK). This organization has the mandate of granting and withdrawing telecommunication licenses. Safaricom’s majority market share in the mobile telecommunication industry has aspects of Monopoly as implied by Jevans Nyabiage b. This is one of the main causes of market failure. According to this article, the Communication Commission of Kenya accuses Safaricom of resisting its aim of ‘level the playing field for mobile phone operators.

’ This means that Safaricom is resisting moves by the regulatory commission to making the market more competitive by lifting barriers such as opposing reduction of barriers to entry. Barriers to entry in this case involve the cost of entry into providing 3G services. Safaricom maintains a monopoly by raising barriers to entry namely high cost of investment, technological capacity and legal barriers. Safaricom was the first operator to obtain the 3G license. This company paid $25 million to CCK.

This was a high capital venture considering the returns and financial power of the operators present at that time. Safaricom therefore enjoyed a monopoly since it was the only company which could afford acquiring the 3G telecommunication network license. The second form of barriers to entry is technological capacity. Having the 3G network ensured that the company enjoyed superior technology in offering its services (Nyabiage a). This company could therefore enjoy more efficiency in its production compared to any other telecommunication service provider.

Barriers to entry are characteristics of a monopoly in a market. Monopoly is a cause of market failure in the Kenyan telecommunication industry. Legal barriers to entry are also visible as Safaricom tries to use the courts of law to address its interests. The outcome of this legal case will be determined in January 2011. The court may rule that either CCK maintain the fee at $25 million licensing fee, refund $15 million to Safaricom or rule against Safaricom’s plea and support the decision for CCK to grant 3G licenses to Safaricom’s competitors at $10 million down from $25 million (Nyabiage a).

The first possible ruling would set up a legal barrier to entry by barking the high cost of acquiring the 3G license. This is a source of market failure because Safaricom will still have its monopoly power over the consumers and the rest of its competitors. Lack of perfect or close substitutes to outputs by a firm is a source of market failure since it creates a form of monopoly. Safaricom being the only company having the 3G network prior to licensing of Orange Telkom indicates that its 3G service had no perfect substitutes.

3G networks are credited for their fast in nature data transfer which is strictly preferred by both consumer and commercial subscribers. Since Safaricom was the only company providing such superior services to the market, it had in check any possible competition in its market hence exercising monopoly power. This leads to market failure because there is no perfect substitution associated with a competitive market. Market Failure associated with Monopoly Table 1: Implications of a Monopoly Super-normal profits associated by a monopoly (shown by the shaded green area) arise from consumption of consumer surpluses.

This is in line with CCK’s claim that Safaricom is of trying to make gains at the expense of consumers. To prove this further, Safaricom data rates were Kshs. 8 before the license was grated to Orange Telkom. CCK increased the competitive nature of the Kenyan telecommunication sub-market by Granting a second operator the 3G license hence increasing competition in this sub-market segment. Safaricom currently has its data rates revised to Kshs. 4. This reduction in price is associated with entry of new players in an industry and corresponds with increased output by the monopoly as it tries to maximize its profit in the more competitive market.

From the above graph, entry of competition in a monopolist market makes a monopoly reduces price from Pm to P1 and increases output to Q2 from Qm. This is arguably consistent with safaricoms dynamic price mechanism after the 3G license was granted to a competitor. Super normal profits are likely to keep on reducing upto zero. Works Cited Economicshelp.org. Diagram of Monopoly. Retrieved on 29th December 27, 2011 from http://www.economicshelp.org/microessays/markets/monopoly-diagram.html Nyabiage a, Jevans.

CCK Says Safaricom 'Arm-Twisting' It at Consumers' Expense. Nairobi: Business Daily. 2011. Retrieved on 27th December 27, 2011 from http://allafrica.com/stories/201111170055.html Nyabiage b, Jevans. As Safaricom Sheds More Market Share, Small Rivals Make Big Gains. Nairobi: Daily Nation. 2011. Retrieved on 27th December 27, 2011 from http://allafrica.com/stories/201111170055.html