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Table of Content
Introduction .......................................................................................................................... 6 Market Structure and Different Types ................................................................................. 9 The Dominant Market Structure ........................................................................................ 12 Competition................................................................................................................ 12 The Four Firm Concentration Ratio ........................................................................... 13 Homogeneous Products and Services ........................................................................ 14 Differentiation of Product and Services ..................................................................... 15 Interdependent Firms ................................................................................................. 15 Price and Sales Mechanisms ...................................................................................... 16 Market Capturing Strategies ...................................................................................... 17 Kinked Demand Curve .............................................................................................. 19 Entering Barriers ........................................................................................................ 20 Price Wars .................................................................................................................. 20 Mergers and Acquisitions .......................................................................................... 21 Cartels ........................................................................................................................ 21 Collusion Tendencies and Incentive to Cheat ............................................................ 21 Herfindahl Index ........................................................................................................ 21 Conclusion ......................................................................................................................... 22 Reference ........................................................................................................................... 22 Appendix ............................................................................................................................ 24
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Introduction
Assignment Objectives
Understand what Market Structure is. Identify different Types of Market Structures available by research. Understand the Dominant Market Structure to which the organization belongs. Present a comprehensive Justification with use of illustrations in order to support the decision made regarding the dominant market structure.
Industry Background
This report intends to identify and analyse the industry/market structure of a company in mobile telecommunication industry. Sri Lankan mobile market consists of 5 mobile telecommunication service providers, who also provide various kinds of other facilities as well. The following chart clearly shows that how many Sri Lankans have access to a mobile phone inside the country. According to the statistical overview of the Telecommunication Sector as at end of 2nd Quarter 2009, Number of Cellular Mobile Subscribers is nearly 13 million (12,658,483)
38.0% 62.0%
Mobile Subscription
No Access to Mobile
Figure 1: Accessibility of Mobile Telephony [Source: (Telecommunications Regulatory Commission of Sri Lanka, 2009) ]
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Currently, mobile telephony industry is four times large than fixed line telephony services in term of subscriptions. The following graphs illustrate how the Sri Lankan mobile telephony market has been grown up during last 15 yearsâ€&#x; time. The number of mobile subscriptions has been increased heavily on last eight years. 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000
4,000,000 2,000,000 0
Figure 2: Mobile Subscribers Growth (1992 – 2009 June) [Source: (Telecommunications Regulatory Commission of Sri Lanka, 2009)]
The mobile service providers have played a big role in this rapid growth. They have been very successful in promoting the technology throughout Sri Lanka. At the same time, they have managed to bring down the latest mobile technology in to the country and uphold Sri Lanka in to a better place among South Asian region countries.
Currently, most of the mobile services providers provide various kinds of services other than mobile communication facility. Some of the Common product and services are IDD calls, High Speed Internet, Voice Telephony Service, Voice Mail Service, Short Message Service (SMS), Multimedia Messaging Service (MMS), 3G Services such as Video Calls, IDD Video Calls, and TV on the Phone, 3D Phone Games and Music Video Streaming.
Even though some companies have issued shares into the stock market, all the companies operating in Sri Lankan mobile telephony market are owned by foreign companies.
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Organization Background
“Tigo, Sri Lanka’s first cellular network commenced the operations in 1989. Since its inception in 1989, Tigo has consistently provided not only the widest coverage and an unprecedented service, but also a host of other Value Added Services.”
“People enjoy access to their world. We create A world where mobile services are affordable, accessible and available everywhere and to all.” (Tigo Sri Lanka, 2009) Tigo (Private) Limited is the oldest mobile telecommunication provider in Sri Lanka. Previously, Tigo was known as Celltel Lanka Limited. Even now, the licenses are issued under that name by the Telecommunications Regulatory Commission. Tigo (Private) Limited was a subsidiary of Millicom International Cellular and recently bought by Middle East operator Etisalat under their Global market expansion program.
Currently, Tigo has nearly 2.3 million subscribers around Sri Lanka (Business Monitor International, 2009). Their networks operate under most popular mobile telephony GSM 900/1800. Tigo is maintaining 17.3% of the market share being the third place in mobile telecommunication industry. Tigo look forward to expand their coverage with their new Figure 3: Logo of the Tigo
parent company, Etisalat Corporation.
1
[Source: (Tigo Sri Lanka, 2009)]
Methodology
The data has been collected through Web Sites, Published Journals, Business Reports, Corporate Sites, Government Approved Publications and Other documents available on the internet. No field visits or market research has been done in order to collect data. However, gathered data were analysed using both quantitative and qualitative methods. 1
Logo is a property of Tigo (Private) Limited Company.
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Market Structure and Different Types Market Structure “In economics, market structure (also known as market form) describes the state of a market with respect to competition.”
(Wikimedia Foundation, 2009)
“The way that suppliers and demanders in an industry interact to determine price and quantity.”
(Deardoff, 2006)
“Term used to describe the organization of the market, such as whether there is a high degree of competition, a Monopoly, an Oligopoly, or Monopolistic competition” (Stiglitz & Walsh, 2006) “The important features of a market such as the number of firms, uniformity across firms, ease of entry, and forms of competition.”
(Credit Research Foundation, 2009)
Some of the definitions for „Market Structure‟ are listed above, which extracted from different sources. However, every definition fairly means the same. It is possible to categorize industries in to different market structures by evaluating their characteristics.
Different Types of Market Structure
(IIHE Managerial Economics Notes, 2009)
1. Perfect Competition Horizontal Demand Curve (Perfectly Elastic Demand). Large number of firms. Homogeneous products (Ex: Sugar, Salt etc.). No entry and exit barriers. Both the buyers and the sellers possess perfect knowledge about the markets. No transport costs within the markets. Perfect mobility of factors of production.
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2. Monopolistic Competition There are many firms, but not as much as in Perfect Competition. There is freedom of entry. Each firm produces differentiated products. Products are close substitutes to each other and they are branded (Ex: soap). If the price is increased, the firm will not lose all its customers. If the price is decreased, the firm will not win all the customers who are with the competitors. Firms often cut prices to increase its market share. Firms also use advertising and special promotions to gain market share.
3. Oligopoly Only a few large firms (2 - 10) are in the market. Perfect Oligopoly refers to homogeneous products such as oil & steel. Imperfect Oligopoly refers to differentiated products such as Cars. Firms are interdependent. If a firm increases its price above the market price, the others will not follow and the firm will rapidly lose sales. If a firm reduces its price below the market price, the others will follow and the firm will slowly increase its sales. Less price wars but different other strategies to capture the market. Kinked demand curve.
4. Monopoly There is only a single producer. No close substitutes. No freedom of entry. Practice price discrimination.
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After considering the characteristics mentioned above, it can clearly see that the industry which Tigo (Private) Limited belongs to an Oligopoly Market Structure. The most important characteristic is „Number of Firmsâ€&#x;. Sri Lankan mobile telecommunication industry consists with five large service providers as mentioned in the Oligopoly definition, which is between 2-10 firms.
From here onwards, each and every characteristic will be discussed one after the other by comparing to different market structures in order to justify the decision made regarding the industry market structure as Oligopoly Market Structure.
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The Dominant Market Structure 1. Competition
There are five mobile telephony operators in Sri Lanka by end of June 2009. Therefore, the competition is between these five companies. When it consider the number of firms, the market structure is more likely to be an Oligopoly.
Under Perfect Competition, there should be large number of firms in the industry. Monopolistic Competition should also consist of many more companies. Mobile telecommunication sector is not governed by one corporation as well. Therefore it cannot be Monopoly. However, in Oligopoly it says, “Only a few large firms (2 - 10) are in the market� As the industry has only five competitors, the dominant market structure is Oligopoly. The following illustration shows the logos of five mobile telephony companies and under their names. Tigo is the oldest company and Airtel is the newest competitor who entered to the market. However, there is much room in Sri Lankan mobile market. According to Figure 1,
still nearly 40% does not have access to mobile phones. The competition is to
capture market share, increase revenue and increase profits. 1. Dialog
2. Mobitel
4. Airtel
3. Tigo
5. Hutch
Figure 4: Logos of Five Mobile Telecommunication Corporations
1
[Source: Respective Corporate Websites] 1
Logos are properties of their respective owners.
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2. The Four Firm Concentration Ratio
Market Share can be defined as, “Percentage of total sales/subscriptions volume in a market captured by a brand, product, or firm.�
(WebFinance, Inc, 2009)
According to the above definition, Sri Lankan mobile market share is divided in to five companies as follows. Dialog Telecom governs nearly 47.1% of the market. The Tigo (Private) Limited is in the third position by having 17.3% market share. There is a way that these market shares can be used to identify the market structure. The concept is called, „The Four Firm Concentration Ratioâ€&#x;.
“This is the scale that determines whether an industry is Monopolistic competition or Oligopoly. If the combination of market share of the four largest firms in a single industry is equal or greater than 40%, the industry is consider as Oligopoly. A concentration ratio reveals the percentage of total output produced and sold by the industry's largest firms.� (Welker's Wikinomics, 2007) According to the above methodology, 47.1% + 23.5% + 17.3% + 7.9% = 95.8%
đ?&#x;’đ?&#x;Ž% ≤ đ?&#x;—đ?&#x;“. đ?&#x;–%
7.9% 4.2% 17.3%
47.1%
23.5% Dialog
Mobitel
Tigo
Airtel
Hutch
Figure 5: Sri Lanka Mobile Market by Operator (Q209) [Source: (Business Monitor International, 2009)]
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According to the calculation, the Mobile Telecommunication industry structure in Sri Lanka can be identified as Oligopoly Market Structure. The following chart shows the number of subscriptions each company holds.
7 6 5 4 3 2 1 0
6.33
3.15 2.32 1.06
Dialog
Mobitel Dialog
Tigo
Mobitel
Tigo
Airtel Airtel
0.56 Hutch
Hutch
Figure 6: Number of Subscribers (Appx.in millions) [Source: (Telecommunications Regulatory Commission of Sri Lanka, 2009)]
3. Homogeneous Products and Services
According to the defined characteristics, the firms belong to both in Perfect Competition and Oligopoly markets structures work with homogeneous product and services. In this circumstance, Tigo Sri Lanka is in the mobile telecommunication industry. Mobile telecommunication can be considered as an industry where it offers products and services which are homogenous. That means all the firms who are in mobile industry offers same kind of product and services. Basically Local and IDD calls, SMS MMS‌etc. However, it is not possible to come to a conclusion by considering only this characteristic. Oligopoly has two main categories, i. Perfect Oligopoly
- Homogeneous Product and Services
ii. Imperfect Oligopoly - Differentiated Product and Services However, firms in Sri Lankan mobile telecommunication industry show both the features. Most common product and services like Local calls, IDD calls are provided by all the firms. But only few firms offer the new services like 3G technology.
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4. Differentiation of Product and Services
“A marketing process that showcases the differences between products. Differentiation looks to make a product more attractive by contrasting its unique qualities with other competing products. Successful product differentiation creates a competitive advantage for the seller, as customers view these products as unique or superior.” (Investopedia, 2009) In the mobile telecommunication industry, the product and service differentiation can be explained as follows, Differentiation in Network coverage Differentiation in Packages (Prepaid / Post-paid) Differentiation in technology like 3G / 3.5G Differentiation in Customer Service Differentiation in Value Added Services like ringtones, Information Services Alerts, Mobile Entertainment. As discussed earlier, Imperfect Oligopoly refers to differentiated products and services. This characteristic is not available in Perfect Competition. However, this is visible in both Monopolistic and Oligopoly market structures. Therefore, it is not possible to come to a conclusion regarding the industry market structure by considering only this characteristic. But this characteristic helps to narrow down to the correct answer.
5. Interdependent Firms This is a unique characteristic in Oligopoly market structure. Therefore this characteristic can be used to justify the decision made on industry structure as Oligopoly. According to the Sri Lankan mobile telecommunication industry what does this mean is, the actions done by one firm cause effect on other firms. For example, reducing or increasing prices, introducing latest technology, improving network coverage, advertising, promotions. In real time situation, sometime ago one company introduced 3G technology. After that the other company comes up with 3.5G technology by responding to it. Economics
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It is possible to see it in a different point of view as well. All the five firms in the mobile market use common resources like communication highways, satellites and shared antennas around the country. Therefore if any of these resources get collapsed or interrupted, all firms will get affect from it as well. This also can be interpreted as interdependence.
6. Price and Sales Mechanisms
This is also a unique characteristic which helps a lot in order to identify the industry market structure. In Monopolistic Competition: If the price is increased, the firm will not lose all its customers. If the price is decreased, the firm will not win all the customers who are with the competitors. In Oligopoly: If a firm increases its price above the market price, the others will not follow and the firm will rapidly lose sales. If a firm reduces its price below the market price, the others will follow and the firm will slowly increase its sales. By comparing the above two market structure, it is very clear that Oligopoly definition is the most stable definition to describe the real environment in Sri Lankan mobile telecommunication industry. For example, recently industry experienced the abovementioned issue. When the newest mobile telecommunication company, Airtel came in to the market, they were planned to introduce very low prices than the market price at that time. When other companies get this information, they also reduce the prices within overnight, because they all know how critical that is. If they do not reduce their prices, they will lose customers very quickly. This situation can also be used to explain the interdependence as well.
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7. Market Capturing Strategies
“Firms will avoid price wars and concentrate on non-price strategies to win market share. They use strategies such as better product design and finish, improvement of quality, better packing, after sales services, effective distribution, advertising, promotions, guarantees etc.�
The above statement is a characteristic definition of Oligopoly market structure. No other market structure has this characteristic. Therefore this is a very important feature to justify the decision regarding the industry market structure. The five firms involve in mobile telecommunication business spend heavily on market capturing strategies other than pricing strategies. The industry was in a price war sometimes back when the 5th competitor come in to the market. However, now the prices are settled down and no more price wars. Now every firm tries to build their strategies to capitalize on non-price activities as follows. Therefore, the above statement exactly describes the current behaviour of the mobile market.
i.
Advertising
Every firm spend large amount of money on advertising. Recently the firms spend millions and millions to create even one single TV advertisement. All the companies use different creative advertisements to attract people. TV, radio and newspaper advertisements, holdings in the road and many more are used as advertising mediums.
ii.
Promotions
These days every firm introduce new services, new packages and technologies. Especially they bundle up the product and service to deal with different needs of people such as for love couples, university student groups; families of soldiers, government workers, and children...etc. promotions are happening so heavily by giving SIM cards free and having stalls even in bus halts.
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iii.
Sponsorships
Very recently, one company sponsored the Sri Lankan cricket team by spending unbelievable amount of money. Some firms sponsor other sports like local football, volleyball, rugby. Firms sponsor lot of cultural and social events in Sri Lanka as well, like Sinhala New Year, Wesak, Christmas‌etc.
iv.
Quality and Technology
This is a very interesting factor. Every firm in the mobile telephony industry spends lot of money on expanding the coverage. Still the coverage is lack in north and eastern provinces and hills in central. However they are now working to improve the quality by expanding the coverage. The firms operating in Sri Lanka should have the credit of bringing the latest technology in to the country. It was seen the firms competitively introduce latest technologies like 3G and 3.5G by upholding the country in to a sophisticated place in south Asia in term of mobile technology. The network coverage of the each mobile operator is attached in the appendix
v.
Value Added Services
It is not worth to list down all kind of value added services here. However it is important to mention that, every firm working hard to offer more and more value added these days. Because this is the area that firms can capture the market by making their customer more satisfy. Every firm offer large number of value added services which directly matter in customer satisfaction.
vi.
Customer and Community Service
Customer service directly related with customer satisfaction. That is why each company maintains large number of customer support executives to help their customers all the time, even for 24/7. Otherwise there is a probability to lose their existing customers.
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Community services are also important in more cultural oriented countries like Sri Lanka. Society always monitors each action taken by the firms. That is why firms spend considerable about of money on community services as well. Some of the sponsorships are falls under community services such as funding „Api wenuwen api‟.
8. Kinked Demand Curve The following diagram shows the demand curve of the Oligopoly market structure. This diagram is the most suitable diagram among all demand curves related to various market structures. The diagram shows how the demand will be fluctuate due to price changes. If one firm increases the price they will lose he market very soon. However, even one firm reduces the price than the market price, their market share / demand will not increase heavily. This is the graphical representation of „Price and Sales Mechanisms‟ explain above.
Figure 7: The Kinked Demand Curve Model [Source: IIHE Managerial Economics Notes, 2009]
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9. Entering Barriers Entering barriers are common to both Monopoly and Oligopoly market structures. Therefore, it is not possible to come to a conclusion regarding the industry market structure by considering only this feature. But this feature helps to narrow down to the correct answer. Entering barriers in mobile telecommunication can be explained as follows. When there are existing players in the industry, they have already settled down their infrastructure around the country. However, when a new firm comes in, they need to spend lot of time in establishing the infrastructure. Therefore, in the establishment phase they may need to spend huge amount of money and they will not be able to earn it so soon. It takes lot of time to become profitable. Again the new firms may need to attract customers. In mobile industry it is hard to attract customer, because in each mobile subscription, there is unique number called “mobile number�. All the communication is done through that number. Customers do not like to change their phone number unless they have a big benefit by doing that. Therefore, the new firm should offer an appreciable offer to customers to attract them.
10. Price Wars As it was mentioned earlier, the industry experienced a price war very recently when the fifth mobile service provider come in to the market with very low price margins compared to market price at that time. All other companies reduced their prices overnight as response to that. However it did not last so long. After months it was settled back. Usually mobile communication industry is not in to price war. But time to time we can see it. Firms use non price strategies to capture and attract customer for them. According to the definition itself, in Monopolistic market also do not interest much in price wars. Usually price wars are not exists in oligopoly market structures. Even though we experienced it in mobile telecommunication industry, it is just temporary. However, this characteristic alone cannot be used to identify the market structure.
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11. Mergers and Acquisitions Sri Lankan mobile telecommunication industry has not experienced mergers which can be led to Monopoly market structure. However, acquisitions happed all time. Mobitel acquired by Telecom Sri Lanka, the fixed line telecommunication in Sri Lanka. Recently Tigo was acquired by a new corporation originated in Middle East.
12. Cartels There are no cartels in mobile telecommunication industry; however, it is a main characteristic in Oligopoly market structures. In cartels, usually firms agreed on a common price and try to do the business by capitalizing on other aspects.
13. Collusion Tendencies and Incentive to Cheat “Firms can cooperate and decide on pricing strategies that will provide benefits for both. Without collusion, firms may end up in price wars, where their profits decrease significantly. When firms work together, they act as one big Monopoly power, charging a Monopoly price and earning a Monopoly profit. It may be legal when firms communicate about where they will put their stores, and not about money.” (Welkers Wikinomics, 2009) However Telecommunication Regulatory Commission in Sri Lanka plays a big role to avoid these issues.
14. Herfindahl Index “The HHI measures of the number and size of firms in ratio to the industry. It serves as an indicator of the amount of competition within a market. It is defined as the sum of the squares of the market shares of each individual firm.”
(Welker's Wikinomics, 2007)
0.472 + 0.242 + 0.172 + 0.082 + 0.042 = 0.3154 = 31.5%
Higher amounts such as 31.5% considered as oligopoly, where 100% represent monopoly and very low values such as below 8% represent Perfect and Monopolistic Competitions.
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Conclusion
This report has been discussed about the mobile telecommunication industry in order to identify the dominant market structure, which Tigo Sri Lanka belongs to. At the beginning, the possible market structures have been identified. Then each characteristic in the mobile telecommunication industry were analysed against the available market structures in order to identify the market structure that Tigo Sri Lanka is belongs to.
After analysing the characteristics such as Competition, The Four Firm Concentration Ratio, Homogeneous Products and Services, Differentiation of Product and Services, Interdependent Firms, Price and Sales Mechanisms, Market Capturing Strategies, Kinked Demand Curve, Entering Barriers, Price Wars, Mergers and Acquisitions, Cartels, Collusion Tendencies and Incentive to Cheat, Herfindahl Index, it was felt that the market structure of the mobile telecommunication as Oligopoly.
The selected company, Tigo (Private) Limited competing in an Oligopoly market by holding 17.3% market share, which comprise of nearly 2.3 million subscribers. It operates in the third position in the mobile market according to the market share.
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Reference
Business Monitor International, 2009. Mobitel to Use Google to Gain Market Share Growth. [Online] Available at: http://store.businessmonitor.com/article/283559/ [Accessed 25 November 2009]. Credit Research Foundation, 2009. Glossary. [Online] Available at: http://www.crfonline.org/orc/glossary/m.html [Accessed 22 November 2009]. Deardoff, A.V., 2006. Terms of Trade: Glossary of International Economics. Singapore : World Scientific Publishing Company. Investopedia, 2009. Product Differentiation. [Online] Available at: http://www.investopedia.com/terms/p/product_differentiation.asp?viewed=1 [Accessed 25 November 2009]. Stiglitz, J.E. & Walsh, C.E., 2006. Economics. 4th ed. W.W. Norton & Co. Telecommunications Regulatory Commission of Sri Lanka, 2009. Statistical Overview. [Online] Government Available at: http://www.trc.gov.lk/images/docs/statis_o_june_09.doc [Accessed 28 November 2009]. Tigo Sri Lanka, 2009. About Us. [Online] Available at: http://www.tigo.lk/AboutUs.cfm [Accessed 28 November 2009]. WebFinance, Inc, 2009. market share. [Online] Available at: http://www.businessdictionary.com/definition/market-share.html [Accessed 28 November 2009]. Welker's Wikinomics, 2007. Characteristics of Oligopoly. [Online] Available at: http://welkerswikinomics.wetpaint.com/page/Characteristics+of+Oligopoly [Accessed 28 November 2009]. Welkers Wikinomics, 2009. Oligopoly Behavior: A Game Theory Overview. [Online] Available at: http://welkerswikinomics.wetpaint.com/page/Oligopoly+Behavior:+A+Game+Theory+Overview [Accessed 25 November 2009]. Wikimedia Foundation, 2009. Market structure. [Online] Available at: http://en.wikipedia.org/wiki/Market_structure [Accessed 25 November 2009].
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Appendix Tigo
Mobitel
Dialog
Airtel
Hutch
Service Coverage 3G 2100 GSM 900/1800
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