Economics: Structure of the Mobile Industry and the Key Assumptions under Oligopoly - Assignment Example

Task Mobile Phones are now considered as the essential items for our daily lives and the mushroom growth of the new mobile sets and introduction ofsmartphones has made it possible for people to perform tasks which were previously been done by computers. Such innovation and speed also required improvements from the mobile phone networks also. The overall structure of the industry suggest that there are two type of producers i.e. the one who produce and manufacture mobile phones and other ones who provide data services to communicate and perform other tasks through these mobile phones. The overall composition of mobile phone industry as a whole therefore comprised of different components and the major businesses involved in the sector are: Manufacturers Manufacturers are essentially limited to the manufacturing of mobile handsets and accessories and supply them to the mobile phone network service providers. Most of the major manufacturers of mobile phone sets are however, foreign and UK imports mobile phones. Major manufactures of mobile phone handsets include Nokia, Samsung, Apple, Sony Ericson are all foreign firms providing mobile phone handsets and other accessories to the service providers.1 Network Operators Network operators offer airtime and data services to the end users as well as other tied services. They also offer services to indirect services providers as well as the virtual network service providers. They also sell packages to the customers as well as to the dealers to provide pay as you go as well as other bundled services to end users. Dealers Dealers actually operate through their retail outlets and offer mobile phone handsets as well as services obtained from the network operators. Though there are large numbers of smaller and independent dealers however, market seems to be dominated by the few very large dealers such as phone4U and other dealers. The above components of the market work in tandem with each other however, the focus of this paper will be on the mobile network operators. Mobile Networks The growth of mobile phone networks in UK started during 1985 when government started to de-regulate the market. Since then there has been mushroom growth of the mobile networks in the country. Over the period of time, new services have been added thus increasing the overall depth and breadth of the market. (Doyle and Smith, 1999) Mobile network operators are telecommunication firms which buy the license from the government to provide data and network services to the end users of mobile phones. Some estimates suggest that there are more than 80 million users of mobile phone data services across the country. Such growth in the market therefore suggests that UK is one of the growing markets for the mobile phone networks. What is also critical to understand that the overall number of service providers have remained limited despite such growth in the market. Initially very few operators were allowed to operate however the overall inclusion rate has increased in the recent past. Firms like Orange, O2, and Vodafone are now considered as industry pioneers because they were the early players in the market having developed the market and gained the first mover advantages. Market Structure Considering the overall information into account, the market structure of mobile phone networks in UK is an oligopoly. Oligopoly is a market structure where the overall market is dominated by small number of sellers. As evident from the data and other information, the overall number of users in the market is over 80 million however; market is served by less than 10 sellers. The major players in the market are however, still limited with O2 having market share of 27% whereas as Orange, Vodafone and T-Mobile has a combined market share of 65% thus making these four firms controlling more than 90% of the market share.2 One of the key aspects of oligopoly market share is based upon the assumption that the market power of the four large firms can be obtained by using concentration ratio. Concentration ratio indicates the market power of four largest firms in the industry and the higher this ratio is, more power lies with few players in the market.( Pindyck, and Rubinfeld, 2001) As discussed above that the top four firms in the industry are controlling more than 90% of the market share suggests that the mobile phone network industry is dominated by four firms. It is critical to note that since the overall number of players in the market is limited under oligopoly therefore firms are conscious about the moves of other firms and strategic planning in this market structure requires that the moves of other players in the market need to be closely monitored. It is critical to note that in oligopoly the barriers to entry and exit are high and oligopolists are often able to set the prices rather than work as the price takers. Firms can often collude with each other in order to stabilize the market whereas competition can also become some time fiery with very low prices and high production. For a firm to be successful in this market structure, it is critical to understand that the firms should take the first mover advantage. It has been argued that with the growth of smartphones, the mobile network markets in UK and other parts of the world are converging with operators not only offering basic services but other services too. The range of services such as internet, mobile TV and high-end services therefore suggest the convergence of the market. A firm working in this industry therefore need to take into account what other players are doing and should adjust its strategies accordingly. The overall fluid nature of the technology market therefore suggest that the firms should continue to make strategic adjustments or gain first mover advantages by entering into those segments of the market which are not well served. Further, there is a lot of non-price competition such as offering free handsets, data services as well as MMS and other free bundles therefore firms need to continue to evolve its overall product offering to successfully compete in the market. Task-2 One of the key assumptions under oligopoly is that the firms often tend to react towards the actions of other firms. The overall demand therefore is considered as dual in nature as the firms not only have to focus on the demand from the consumers but also depend upon the likely reactions of other firms in the market also. One of the key assumptions therefore is that the firms tend to manage their market shares and as such increase in prices is not matched. Most of the firms operating in the industry therefore focus upon price falls rather than price increase. (Samuelson & Marks, 2003) The above curve shows a kinked demand curve for a firm working in oligopoly market indicating that if a firm increases the prices and other players in the market don’t follow the move, there will be larger substitution effect. Due to this substitution effect however, there will be a shift towards other firms in the market. This indicates that the demand in oligopoly is price elastic in nature and an increase in prices may witness a reduction in the market power for the firms. Price reduction if followed by the same actions by other firms in the market however may see very little change in the market share. It is assumed that the price reduction if followed by other firms in the market may make demand as price inelastic and there will be no changes in the market share for the firm. The kinked demand curve therefore suggests that when a firm achieves a profit maximization combination of quantity and price, there will be little incentive for firms to alter their prices. (Perloff,2008) It is critical to note that the supply in the market is largely driven by the demand from end users. The increasingly complexity and range of expansion in the market suggest that the consumers demand more data, higher speed levels, better coverage as well as affordable prices. These factors seem to further heat up the non-price competition within the market with major firms focusing on rich contents. 3It is suggested that the users have made their PCs as the benchmark and expect same services to be delivered to their mobile phones in efficiently and less expensive manner. This fluid nature of the market therefore indicates that the firms continue to focus on meeting these demands through the constant supply of new services at relatively same prices. The above phenomenon therefore can be explained through the kinked demand curve where achievement of profit maximization price and quantity combination will not result into further distortion of the prices. It is also important to note that the demand is largely also influenced by the way products and services are marketed to the consumers. Non-pricing variables such as better quality, marketing and advertising play large role in determining the overall market demand for the services. Quality plays important role because consumers expect to receive faster and uninterrupted services from the mobile phone networks. The emergence of smartphones has opened the demand for other services such as high speed internet access, small software applications as well as navigation services. Such expansion of services however, is not coming through price increase and the overall prices are considered as relatively stable. The convergence of the market therefore may further blur the distinction between the players and other markets such as news, tv as well as films may also converge with mobile phone networks to offer their services on the small mobile phone sets.4 The above discussion therefore indicates that the overall traditional boundaries between the firms working in same industry and other industries may further blur and the demand for services may depend upon the ability of service providers to offer bundled services. Task-3 Elasticity measures the degree to which the supply and demand curve responds to the changes in the prices. It is critical to note that the elasticity may vary according to the products such as necessities and luxuries. Elasticity = (% change in quantity / % change in price) Elasticity can be both in the demand as well as the supply of the products and as such the changes depend upon the manner in which both the variables react to the changes in the prices. There are three types of elasticity i.e. price, income as well as cross elasticity. Price elasticity measures the changes in quantity demanded due to change in prices, whereas income elasticity measures the changes in demand due to changes in consumer income. Cross elasticity however, measures the changes in quantity demanded of one good for changes in the price of another good. As discussed above that the market is an oligopoly in nature therefore firms often enter into collusion for price fixing as well as price leadership. The theory of oligopoly suggests that once the firms achieve profit maximization price and quantity levels, it is less likely that the firms will change the prices. The overall strategic moves of the firm therefore depend upon how other firms react to the changes. If a firm increases the prices and other firms will not follow the move, there is a higher probability that the demand will be price elastic in nature. (Ayers, 2003) This therefore means that there may be switching of the customers to other network services providers. It is because of this nature of the pricing that the firms in the industry offer contracts in which prices are locked for the period of the contract. Fixing prices through contracts ranging from 12 month to 24 month contracts also ensures that other features such as internet data are fixed too therefore firms effectively reduce the impact of subsequent price changes on the overall revenue of the firm. Supply is elastic too as the firms respond to the changes in the demand as this is potentially a service oriented industry with relatively little constraints on the level of output. Firms can increase the number of subscribers through better managing the demand from the consumers for different services. References Ayers, C. (2003) Microeconomics.. New York: Pearson. Doyle, C. and C. Smith, J. (1999) MARKET STRUCTURE IN MOBILE TELECOMS: QUALIFIED INDIRECT ACCESS AND THE RECEIVER PAYS PRINCIPLE. Regulation Initiative Discussion Paper Series, Iss. 21. Perloff, . (2008) Microeconomics Theory & Applications with Calculus. . New York: Pearson. Pindyck, R. and Rubinfeld, D. (2001) Microeconomics. 5th Ed. New York: Prentice-Hall. Samuelson, W.; Marks, S (2003) Managerial Economics. New York: Wiley. Read More