Competitive Structure
And Pricing in Telecom
Industry
Ankit Sachdeva
Heena Pahuja
Kaarthvya Chodey
Ram Narayan
Shivam Sethi
Vishnu Chaithanya
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Roadmap
Evolution and Present Scenario
Demand Analysis
Competitive structure
Barriers to Entry
Non Price Competition
Pricing Strategy
Price Discrimination
Future Outlook
Evolution of Telecom Sector
Before the entry of the private players, the telecom
services were provided by three public entities viz. DoT,
MTNL and VSNL
Liberalisation process in the telecom services market
began in 1992, when the Indian government permitted
private players to provide value added services like
paging , fixed telephone services.
Telecom Industry in India
Telecom sector contributes nearly 3% to Indias GDP and has
seen a tremendous growth in the last decade before relatively
slower growth in last three fiscals
It has emerged as the worlds second largest network and has
the third largest number of internet users in the world after
China & the US
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Demand Analysis
The majority of the Indian population is in the age group
of 15-54 in India.
The majority of users who use mobile phones belong to
this category in India.
Hence, it is a huge market for telecom service providers.
According to a study conducted by Cyber Media Research
Group the Indian Telecom sector will grow by about 20
percent CAGR in the next 3 years.
Market Penetration
Market Share of the Telecom Sector
As on June 30, 2014 (Source: TRAI)
Major Market Players
S. No
Company
Bharti Airtel
22.87
Vodafone
18.57
Idea
15.19
Reliance
11.90
TOTAL
Market
Share(%)
68.53
As per the Four-Firm Concentration Ratio analysis, it can
be observed that the Indian Telecom Industry follows an
oligopolistic structure.
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Herfindahl-Hirschman Index (HHI)
Company Market Share (Si)
Si2
Bharti Airtel
22.87
523.04
Vodafone
18.57
344.84
Idea Cellular
15.19
230.74
Reliance
11.90
141.61
BSNL
9.78
95.65
Aircel
7.99
63.84
Tata
6.87
47.20
Telewings
4.30
18.49
Sistema
1.00
1.00
Videocon
0.61
0.37
MTNL
0.37
0.14
Loop
0.31
0.10
Quadrant
0.25
0.06
TOTAL
Concentration Levels
Level
Concentration
Ratio
Herfindahl
Index
High
80% to 100% 1,800 to 10,000
Medium 50% to 80% 1,000 to 1,800
Low
0% to 50%
0 to 1,000
HHI in terms of market share
reaffirms our inference about the
oligopolistic nature of the sector.
1467.07
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HHI based on Spectrum
Company
Bharti Airtel
Spectrum
Share (Si)
Si2
17.19
295.53
9.16
83.85
BSNL
25.89
670.49
HFCL
0.24
0.06
Idea Cellular
8.96
80.21
Loop Mobile
0.35
0.12
MTNL
Reliance
Communications Ltd
2.85
8.15
9.48
89.81
S Tel **
Sistema Shyam
Teleservices
0.53
0.28
1.39
1.92
Tata Teleservices Ltd
7.10
50.38
Telewings (uninor)
1.53
2.33
Videocon Telecom
1.06
1.11
11.51
132.42
2.77
7.69
Vodafone
Aircel Ltd
Reliance Jio
TOTAL
1424.37
HHI based on spectrum share
further confirms the existence of
Oligopoly.
Data Source: Crisil Research
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COMPETITIVE STRUCTURE
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Oligopoly and Indian Telecom
Few players and Interdependence amongst them
Small operators follow the large ones
The industry is the price setter rather than price taker
Homogeneous or differentiated products
Non price competition
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Why Interdependence?
Most highlighted feature of oligopoly
Dependent on each other over
Pricing
Policy making
Advertising
Apart from demand for service, non price
competition effects setting up of prices
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Network Externalities
Customers joining a communications network obtain benefit
from making and receiving calls.
Their value of being part of the network derives from being
able to communicate with other people.
It therefore increases with the number of people connected to
the network.
Hence, a customers decision to join a network affects both
their own welfare and that of other people. This effect is
known as a network externality.
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Role of Network Externalities
Important role in explaining network expansion
Significant correlation between the absolute size of
telecommunications network and its growth rate
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Homogeneous or Differentiated
Product?
Homogeneous
Oligopoly
Differentiated
Telecom:
Companies offer similar service - network for
wireless communication, internet services,
etc.
Does Competitive outcome in telecom
industry occur with Price?
Is telecom industry a Bertrand Competition
market?
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Bertrand Competition
Companies compete each other over prices rather than
quantity
Assumptions of the model:
Goods/Services are homogeneous
Firms set prices simultaneously & independently
Constant marginal cost for each firm
Market price is same as marginal cost
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Barriers to entry of new firms
Existing firms coming together to restrict the entry of new firms
Entry barriers:-
High start-up cost
Government policies and restrictions
High advertising costs
Licensing costs
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Non-Price Competition
The competition in an oligopoly is not just restricted to price,
but other aspects that impact a consumers buying decision
Non-price competition in telecom includes:
better network coverage
celebrity endorsements
branding
aggressive advertising techniques
better customer service
diversifying into related product line
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Non-Price Competition
Occurs because of the fear of price wars and aggressive advertising
Eventually affects the revenue of a particular firm and also of the
industry as a whole.
Taken as a more critical area of competition rather than price
cutting technique to increase revenues
The only risk associated with non-price competition is the
acceptance of changed product by the existing consumers.
On the other hand consumers get a better product at the same
price which leads to innovative behaviour amongst competitors
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Non-Price Competition
Airtel has always endorsed popular figures with its brand to attract
masses
Vodafone has never endorsed celebrities to the brand and has
created animated characters called ZooZoos
Idea tries to give out a social message through its campaigns.
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PRICING STRATEGY
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Telecom Cost Characteristics
High proportion of fixed costs
Network is essentially 100% fixed costs relative to usage
Variable costs: No variable cost for usage(outside peak
hour), and only a small variable cost for a new access line
Marginal costs: MC close to zero, hence operators cannot
charge on basis of MC
Demand considerations generally make the flat-price
tariff unsuitable as a single-price option
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Evolution of Pricing
Introduction Phase (1995-2000)
Growth Phase (2001 - 2005)
Maturity Phase (2005 - 2009)
Price Wars (2009 2012)
Tariff hikes since 2013
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Is price/sec tariff good for
consumers?
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Kinked Demand Curve
If any firm raises the price over and above the existing
price, the competitors will not follow this change and the
firm will lose the market share.
If any firm lowers its price below the prevailing market
price, the competitors will also try and match the price to
retain the market share. Hence the firms total revenue
will decrease and output will just increase marginally.
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Kinked Demand Curve
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Price Discrimination
Charging different prices to different customers
First degree higher prices during peak hours, reduced
night calling rates
Second degree high cost for initial consumption e.g.
first 3 messages/day, higher price for smaller data pack
Third degree Corporate plans with lower tariff for all
services
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Price Parallelism
Widely prevalent in the industry
Price-fixing between competitors that occurs without any
actual agreement
Leader raises price, then others follow suit
Greater profits from higher prices so long as none
attempts to undercut the others
Insufficient evidence for anti-trust authorities to penalize
for collusion
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Tacit Collusion
With no formal agreement, major players collude to raise
prices
Bid rigging during spectrum auction
Recently, Airtel, Vodafone and Idea have been involved in
tariff hike by almost 20%
Illegal sharing of 3G bandwidth in circles where they do
not have licenses
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On-net vs. Off-net Pricing
On-net calls: Where the recipient is a customer of the
same network as the customer who placed the call
Off-net calls: Caller-Receiver are on different networks
Usually, on-net calls are cheaper compared to off-net
ones
This is mainly because of Termination Charges
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Termination Charges
Call termination refers to the routing of calls from one
operator to another
Termination charges are charged for call termination by
various operators.
3 models of charging exist:1. Calling Party Pays (CPP) Currently existing in India
2. Bill and Keep(BAK) aka peering
3. Receiving Party Pays (RPP) rarely used
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CONTESTABILITY FACTORS
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Tower Sharing
Cell towers are expensive to maintain and operate.
Tower Sharing helps to:
1. Cut down on maintenance costs Reducing operating
expenditure
2. Expansion into rural markets - Reducing capital expenditure
3. Reduction in entry barriers for new entrants
E.g. Indus Towers, Jointly owned by Airtel, Vodafone and Idea
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Spectrum Sharing
TRAI has laid out a proposal to allow spectrum sharing
Under review by DoT on the various guidelines and regulations
proposed
Sharing allowed only if the spectrum were bought in an auction
Both companies should hold licenses in the same band where
sharing is proposed
Increase in the utilization charge rates of both companies sharing
the spectrum
Despite stringent regulations, this is a positive development for
operators
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Mobile Number Portability
MNP enables consumers to retain their existing mobile
phone numbers when switching providers.
Its a demand-side service and has a significant impact on the
market.
The reduction in barriers to switching is of particular benefit to
challenger operators against dominant incumbents.
When MNP is implemented, it sets the stage for a highly
competitive market.
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FUTURE OUTLOOK
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Expansion to rural areas
Urban areas have been covered by most of the service
providers.
large number of rural areas and far fledged villages of
India still need to be connected.
The rural segment offers the highest growth potential for
the Indian telecom sector (68.32 % population)
National Telecom Policy (NTP) has targeted 100% teledensity and 600 million broadband connections by 2020
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Opportunities
New technologies like 3G and 4G
Mobile value added services like mobile banking, mobile
retailing etc.
Development of WiMAX technology
Huge untapped rural subscriber base
Growing number of smartphone users
Shift from voice to data as primary growth driver
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THANK YOU
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