Telecommunications Industry in Singapore

Telecommunications Industry in Singapore

How do oligopolistic firms compete? 

An oligopoly market structure is dominated by a small number of big firms, each with a sizeable share of the market producing either homogenous or differentiated products with substantial barriers to entry. In the real world, oligopolies is largely applicable market structure to many existing firms in Singapore, for example, in the telecommunications field (Singtel, Starhub and M1), in terms of our public transport (SBS and SMRT) as well as our retail petrol market (Caltex, Shell, Exxon-Mobil and SPC). We would be taking a look into the telecommunications industry to see how oligopolies compete in order to maintain or increase their market share. 

In Singapore, there are three main players in the telecommunications field, namely, Singtel, Starhub and M1, with Singtel holding the highest market power of 32% for broadband service provider and 44% for mobile service provider. 

Market Share for Mobile Operators (Fig. 1)
(http://assets.hardwarezone.com/img/2013/02/image001.jpg)

Market Share for Fiber Broadband (Fig. 2)

(http://assets.hardwarezone.com/img/2013/02/image001.jpg)

Oligopolies have a unique feature of being mutually interdependent, which means that the decision of one firm will affect other firms as well. As such, the pricing and output decisions of one firm will have repercussions on another, leading to uncertainty on how firms might react. Hence, this gives rise to various possible behaviours such as collusive and non-collusive behaviours.

Firstly, the telecommunication firms can choose collude in terms of price leadership which is defined as the informal agreement of firms to follow the leader in the pricing decision. Such occurrences only happen over time. The price leader can be the largest or the most aggressive firm in the industry with thr lowest cost. For instance, in this case, Singtel having the largest market share might set prices for fibre broadband services and mobile packages. However, this price is set according to Singtel's own profit maximising level. Other firms like Starhub and M1 would then follow suit. 

Secondly, the telecommunication firms can also choose to collude in terms of forming cartels, which is the formal agreement to set prices and output levels. The pricing and output decisions are made based on maximising the joint profits (i.e. industry's maximum profits as a whole). Members in the cartel would behave like a monopoly and each member is given a quota to produce based on the industry's profit maximising level. However, due to the competition commission act of Singapore (CCS), the telecommunication industry has not been able to form cartels as heavy penalties would be charged on them. 

Other than colluding, the firms can also choose to engage in non-collusive behaviour (i.e. compete) in terms of price and non-price competition. 

Singtel, Starhub and M1 can engage in price wars when there i excess capacity in the industry. Hence, these firms will try to extent their market share by inducing or forcing existing firms to exit the industry. These firms will engage in temporary non-loss minimising behaviour in the short run. As such, smaller firms having insufficient financial resources will exit the industry. For instance, on 9 March 2012, Singtel, Starhub and M1 all dropped prices for the benchmark 100Mbps service under S$50 a month. And since 2011, M1 had been “spoiling” the market offering 100Mbps at S$45, which is way off its usual S$59 in hope to keeping it competitive against its two bigger rivals, Singtel and Starhub.

As such, SingTel and StarHub have decided to follow suit and slash prices aggressively by reducing their prices to $49.90 and $49.95 for the 100Mbps service respectively. Smaller players like MyRepublic and ViewQwest, remain at their prices but are dangling no-contract try-outs as they are likely to find it harder to willingly slash prices to increase their market share like their larger competitors. However, due to mutual interdependency, oligopolist conjectures that its rivals will not match a price increase as explained by the kinked demand theory as prices tend to be sticky downwards. 

As mentioned above, since prices are relatively stable, the telecommunication firms would focus instead on non-price competition. Non-price competition includes that of strenuous advertising, promotional activities, marketing strategies and better quality of after-sale services. Non-price competition aims are reducing the degree of substitutability so that firms are less vulnerable to competitors' pricing strategies. As such, the firm is thus able to increase the demand for its good and and capture a larger market share through advertising. Non-price competition can also make the demand more price inelastic so that firms are able to raise their prices in order to raise total revenue. For instance, the three biggest telecommunication providers in Singapore have spent large sums of money in order to advertise their services and special offers. Some forms of advertisements include flyers, banners in train stations and bus stops, advertisements on television as well as websites like YouTube and purchasing spaces in local newspapers. All in all, M1 has spent approximately S$24.7 million on advertising; SingTel had also committed 20% of their advertising expenditure solely to digital advertising and Starhub had also credited advertising as one of the main reasons for their cash capital expenditure of S$87.6 million in the last quarter of 2013. In addition to advertisements, these firms have also came up with customised mobile packages for consumers based on their needs for services like outgoing calls, SMSes and data bundles, for instance, Singtel, Starhub and M1 had came up with various offers for the currently hot Samsung S5. 

Example of price plan for SingTel for Samsung S5 

(http://info.singtel.com/personal/phones-plans/mobile/android/galaxys5)

Example of price plan for Starhub for Samsung S5 
(http://www.starhub.com/galaxys5#price-plans)

Example of price plan for M1 for Samsung S5 (https://www.m1.com.sg/personal/mobile/phones/details/samsung%20galaxy%20s5%20white)

In conclusion, oligopolistic firms take on many different behaviours due to the unique feature of mutual dependancy. After much analysis from the example of firms in the telecommunication industry, it is largely evident that the most common type of behaviour adopted is the non-collusive behaviour, specifically non-price competition as after much cost and benefit analysis, such a behaviour would bring about the greatest benefits to the firms themselves. These benefits can range from creating a brand loyalty and come up with more unique products, which all, at the end of the day, enable the firms to reach their goal of maximising their profits. 

Resources:

https://www.m1.com.sg/-/media/Files/M1Portal/Annual%20Reports/2013/Annual_Report_2013.ashx

http://info.singtel.com/sustainability-report/2013/marketplace_05_sub4_p2.html

http://www.starhub.com/about-us/newsroom/2014/february/starhub-reports-2013-fourth-quarter-and-full-year-results.html

By: Grace Tan, Rachel Lim, Valerie Chua (13S22)