Oligopoly in the Indian Cellular Market
PREPARED BY: Kanika Jain (14) Pranav Prakash(15) Abhishek Goel(16) Astha Anand(25) Aman Gupta(31) Deepak Khurana(40)
INDEX S.NO
PAGE NO.
PARTICULARS
1
Introduction
2-3
2
Objectives and methodology
4
3
Analysis
5-8
4
Indian telecom in light of Oligopoly
9-10
5
Exclusive assumptions to Oligopoly
11-13
6
Costs that effect the industry
14
7
Idea Cellular
15-17
8
SWOT analysis
18
9
Strategies
19-21
10
Conclusion
22
11
Bibliography
23
1
INTRODUCTION Oligopoly is a market structure in which there are only a few sellers (but more than two) of the homogeneous or differentiated products. The term oligopoly is derived from two Greek words: ‘oligi’ means few and ‘polein’ means to sell. Oligopoly lies in between monopolistic competition and monopoly. Oligopoly is, sometimes, also known as ‘competition among the few’ as there are few sellers in the market and every seller influences and is influenced by the behavior of other firms.
In India, markets for automobiles, telecommunication, cement, steel, aluminum, etc., are the examples of oligopolistic market. In all these markets, there are few firms for each particular product.
The Indian Telecom industry is one of the largest in the world, coming second only to China in terms of total subscriber base. The total number of mobile subscribers has increased from 6.4 million in 2002 to 944.81 million in 2012 at a compounded annual growth rate of 87.7% aided by a significant increase in network coverage and a continual decline in tariffs and handset prices. The mobile telecom industry in India has seen an astonishing growth in the last decade and a half. It is one of the fastest growing telecom sectors in the world [BCG INDIA]. The sector has been given due importance by the government, as it caters to develop a nation socially and economically. In recent years the industry has undergone some serious changes and has been supported by significant policy reforms. The country’s total mobile subscriber base is over 908 million [Telecom regulatory authority of India]. Its phenomenal growth is propelled by drivers such as newer technology like 3G and 4G, better devices and most importantly change in consumer behavior. The market share is dominated by a few larger firms. A few smaller firms are also there but larger firms have a major chunk of the total market share. Over 80% of the market is held by 7 operators.
With this information, it can be deciphered that the nature of economic structure of mobile telecom industry in India can be described as an OLIGOPOLY.
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Idea Cellular is an Aditya Birla Group Company, India's first truly multinational corporation. Idea is a pan-India integrated GSM operator offering 2G and 3G services, and has its own NLD and ILD operations, and ISP license. With revenue in excess of $4 billion; revenue market share of nearly 15%; and subscriber base of over 121 million in FY 2013, Idea is India’s third largest mobile operator. Idea ranks among the top 10 country operators in the world with a traffic of over 1.5 billion minutes a day. Idea’s robust pan-India coverage is built on a network of over 100,000 2G and 3G cell sites, spread across over 55,000 towns in India. Using the latest in technology, Idea provides world-class service delivery through the most extensive network of customer touch points, comprising nearly 4,500 exclusive Idea outlets, and over 7,000 call center seats. Idea’s customer service delivery platform is ISO 9001:2008 certified, making it the only operator in the country to have this standard certification for all 22 service areas and the corporate office. Idea has consistently stayed ahead of the industry in VLR reporting. Idea’s thought leadership on Mobile Number Portability (MNP) has enabled it to stay as the top gainer with the highest net gain. Every 4th mobile user who exercises choice through MNP prefers Idea. Idea offers a range of high-speed mobile broadband devices including Android based 3G smartphones, dongles etc.Idea’s wide portfolio of 3G smartphones offer the latest in 3G applications and high-end data services such as Idea TV, games, social networking etc. at affordable prices. Idea has been a pioneer in introducing customized product offerings for segmented customers. It is the first mobile operator to introduce innovative value added services in the Indian telephony market, and has remained ahead of the industry in data product offerings.
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OBJECTIVES
To study the oligopoly market structure and note down its distinct characteristics
To analyze the Telecommunications sector in India and to check whether oligopoly exists or not in the mentioned sector.
To analyze Idea, a major Telecom company functioning in India and discuss strategies adopted by the company to function in an oligopoly market structure.
METHODOLOGY
Data Forecasting: Forecasting Use of secondary data to analyze various trends prevailing in the industry and within the company.
Trend Analysis: Analysis Analyzing the company’s performance and trend based on historical data.
SWOT Analysis: Analysis Analyzing the strengths weaknesses opportunities and threats to the company
Comparative Comparative Analysis: Analysis Study of characteristics of Indian telecom sector in light of features of an oligopoly.
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ANALYSIS Oligopoly refers to a market situation in which there are a few firms selling homogeneous or differentiated products. The main features of oligopoly are elaborated as follows:
Few Firms Inter-
Non-Price Competition
Selling Costs
Barriers to Entry of Firms
1.
dependence
Group Behavior
OLIGOPOLY
Indeterminate Demand Curve
Nature of the Product
Few firms Under oligopoly, there are few large firms. The exact number of firms is not defined. Each firm produces a significant portion of the total output. There exists severe competition among different firms and each firm try to manipulate both prices and volume of production to outsmart each other. For example example, the market for automobiles in India is an oligopolistic structure as there are only few producers of automobiles. The number of the firms is so small that an action by any one firm is likely to affect the rival firms. So, every firm keeps a close watch on the activities of rival firms.
2.
Interdependence Firms under oligopoly are interdependent. Interdependence means that actions of one firm affect the actions of other firms. A firm considers the action and reaction of the rival firms while determining its price and output levels. A change in output or price by one firm evokes reaction from other firms operating in the market.
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For example, market for cars in India is dominated by few firms (Maruti, Tata, Hyundai, Ford, Honda, etc.). A change by any one firm (say, Tata) in any of its vehicle (say, Indica) will induce other firms (say, Maruti, Hyundai, etc.) to make changes in their respective vehicles. 3.
NonNon-Price Competition Under oligopoly, firms are in a position to influence the prices. However, they try to avoid price competition for the fear of price war. They follow the policy of price rigidity. Price rigidity refers to a situation in which price tends to stay fixed irrespective of changes in demand and supply conditions. Firms use other methods like advertising, better services to customers, etc. to compete with each other. If a firm tries to reduce the price, the rivals will also react by reducing their prices. However, if it tries to raise the price, other firms might not do so. It will lead to loss of customers for the firm, which intended to raise the price. So, firms prefer nonprice competition instead of price competition.
4.
Barriers to Entry of of Firms The main reason for few firms under oligopoly is the barriers, which prevent entry of new firms into the industry. Patents, requirement of large capital, control over crucial raw materials, etc, are some of the reasons, which prevent new firms from entering into industry. Only those firms enter into the industry which is able to cross these barriers. As a result, firms can earn abnormal profits in the long run.
5.
Role of of Selling Selling Costs Due to severe competition ‘and interdependence of the firms, various sales promotion techniques are used to promote sales of the product. Advertisement is in full swing under oligopoly, and many a times advertisement can become a matter of life-and-death. A firm under oligopoly relies more on non-price competition. Selling costs are more important under oligopoly than under monopolistic competition.
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6.
Group Behavior Under oligopoly, there is complete interdependence among different firms. So, price and output decisions of a particular firm directly influence the competing firms. Instead of independent price and output strategy, oligopoly firms prefer group decisions that will protect the interest of all the firms. Group behavior means that firms tend to behave as if they were a single firm even though individually they retain their independence.
7.
Nature of of the Product The firms under oligopoly may produce homogeneous or differentiated product.
If the firms produce a homogeneous product, like cement or steel, the industry is called a pure or perfect oligopoly.
If the firms produce a differentiated product, like automobiles, the industry is called differentiated or imperfect oligopoly.
8.
Indeterminate Demand Curve Under oligopoly, the exact behavior pattern of a producer cannot be determined with certainty. So, demand curve faced by an oligopolistic is indeterminate (uncertain). As firms are inter-dependent, a firm cannot ignore the reaction of the rival firms. Any change in price by one firm may lead to change in prices by the competing firms. So, demand curve keeps on shifting and it is not definite, rather it is indeterminate.
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In the context of Indian Telecom industry, the market share is dominated by a few larger firms. A few smaller firms are also there but larger firms have a major chunk of the total market share.
Market Share Aircel, 5.3% Airtel
Tata, 7% BSNL, 8.2%
Vodafone Airtel, 24.4%
Relaince Idea
Idea, 15.3%
Vodafone, 19.5%
BSNL Tata Aircel
Relaince, 14.9%
The above mentioned figures depict that over 80% of the market is held by 7 operators.
With this iinformation, nformation, it can be concluded that the nature of economic structure of mobile telecom industry in India can be described as an OLIGOPOLY. OLIGOPOLY It is supported by further analysis in this work. In Oligopoly, the large players have a significant share of the total market size. Immense competition is concentrated within these competitors. The other competitors are small and have a minor market share; they are also called niche players of the market. In quantitative terms, oligopoly can be described as a structure which has very less number of highly influential and strong competitors sharing market dominance.
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Indian Telecom In Light Of Oligopoly 1.
Few Sellers There are few strong and influential firms operating in an oligopoly and are competing against each other. The other few firms operating in the market are not dominant and have an imperceptible share of the market. The smaller firms in the market do not have the power to retaliate to the interdependency of the larger firms. It suggests that firms in oligopoly are interdependent on each other for decision making. Each firm measures, predicts or assumes its potential competitor’s reaction when it chooses any business strategy. These decisions could be regarding setting up / change in prices, output or product l ines. In a nation, where population is more than 1.3 billion, lies a huge market potential. As mentioned in the introduction, the fact that there are just 10-12 active players in the market, 7 of which constitute more than 80% of the markets share, substantiates the few sellers assumption of oligopoly.
2.
Interdependence It is one the most highlighted feature of oligopoly. Interdependence in terms of decision making processes. This happens because, the number of influential competitors is few, and the change in price or output by any of the firm causes direct effect on the income of its competitor. So demand of the product by the market is not the only criterion that sets up the price of the service. It is also the ruthless non-price competition that affects the setting up of prices. The firms in the industry are dependent on each other over matters like pricing, policy making, advertising and other issues. As a result of this interdependency the firms have constituted an association called Cellular Operators Association of India (COAI), which protects the common and collaborative interest of its members. Example - One of the reports of COAI dated 21st October, 2011 raises the issue of levying of huge penalties by department of telecom on the telecom operators for minor technical and compliance issues, which was dealt by COAI. The competitors dealt with this case as one organization. The establishment of this association actualizes the interdependency of the firms.
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3.
Entry and exit bar barriers riers The barriers are very high to enter and exit the industry. It is one of the many reasons; firms in oligopoly have greater control within the industry. There can be many barriers to enter this industry, some because of the nature of the industry and some because the incumbent firms act as strong wall. Few barriers are:
High start-up cost
Patents and copyrights
Government policies and restrictions
High advertising costs
Licensing costs.
The strategic actions of incumbent firms try to destroy nascent, discourage and hinder the entry of new firms. Subsequently this aspect of oligopoly gives firms a greater control over the market.
4.
Telecom is a highly technology technology--centric sector Access to the technology typically requires a lot of investment. Ownership of telecom license also represents huge entry barrier. Example – Telenor’s investment in India failed due to high investment that was required to acquire a telecom license. They had to bid in an auction to get the license but could not match the price quoted the market leaders of the industry. This example supports the assumption of high barriers to entry.
5.
Homogeneous or differentiated products There is no set standard in an oligopoly about homogeneity or differentiation of the product/service. It varies from one industry to another. In telecom, the product is homogeneous. As all the companies are dealing in the same product, that is providing network for wireless telecommunication. But there are other examples like leather industry, companies deal in leather products but there product lines are different, like one company makes jackets, the other makes shoes, others deal in belt and bags, but all are part of the leather industry. The service that is offered in telecom is identical or completely homogeneous. 10
Exclusive Assumptions To Oligopoly 1.
Collusion Collusion is a secret agreement between entities for a profitable purpose. Describing in economic terms it is, when firms operating in an industry cooperate on some issues for mutual monetary or non-monetary benefits. It is often seen in the market form of oligopoly. The decision of a few firms to collude significantly impacts the market. Although collusion is illegal in many economies, it is still practiced. The one practiced is called implicit collusion i.e. when firms make same pricing decisions but do not consult each other. Sometimes the market leader takes a price change decision and other firms tend to follow. In Indian telecom sector, collusion was seen between companies to fix the spectrum price to be auctioned by the government. Billions of dollars were lost due to this practice and several senior executives of the firms were arrested for the charge.
There is a body working for the rights of the cellular providers, The Cellular Operators Association of India (COAI) which was constituted in 1995 as a registered, non-profit, non-governmental society dedicated to the advancement of communication. COAI’s main objectives are to protect the common & collective interests of its members. •
Price Leader There is a cut throat competition in the Indian Cellular market and there is no scope of having a single Price Leader in the market, as all of them compete for the prices and the customer base.
•
Abnormal Profits There is no evidence of abnormal profits in the Indian Cellular Market, as these providers are not competing among themselves for the higher market share and the profits. The Indian cellular market is also regulated by the Telecom Regulatory authority of India (TRAI). So there is very less chance for the competitors to gain abnormal profits .
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2.
Game theory ‘Economists are interested in bargaining not merely because many transactions are negotiated (as opposed to being entirely determined by market forces) but also because, conceptually, bargaining is precisely the opposite of the idealized "perfect competition" among infinitely many traders, in terms of which economists often think about markets. Bargaining situations concern as few as two individuals, who may try to reach agreement on any of a range of transactions which leave them both at least as well off as they could be if they reached no agreement.’
In simple terms, game theory can be described as the theory in which firms competing against each other choose action or strategies that affect each participant. In the case of Indian telecom telecom, the dominant players like Airtel, Vodafone, Reliance or Idea may settle for a reasonable share of the market, in lieu of their existing market share. It analyses the interdependent behavior of the firms in an oligopoly. It indicates the how the choices between operating firms affect the outcome of a game. Game theory is concerned with the choice of best or optimal strategy in conflict situations. Strategic behavior refers to the plan of action or behavior of an oligopolistic after taking into consideration all possible reactions of its competitors, as they compete for profit or other advantages.
3.
Kinked demand curve This is the most distinct feature of the oligopoly. The kinked demand curve advocates two things about a firm’s demand curve. Each firm’s demand curve is kinked at the prevailing price. 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. This would cause the consumers to shift to the suppliers providing the same service for a lesser price. 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 firm’s total revenue will decrease and output will just increase marginally.
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Another feature kinked demand curve holds with itself is the ‘price stickiness’. The price that is charged by the firms in oligopoly covers the cost of its production and also gives them excess profit at times. The change in price comes with the collaborative decision of the oligopolists. But the firms fear the loss of their market share when price is hiked and not gaining much when price is reduced, this makes them stick to the prevailing price and hence the price becomes ‘sticky’. The cellular service provider industry already has a kinked demand curve. Below the certain price, demand is inelastic and so lowering the price does not increase sales by enough to offset the lost revenue per unit sold. (Total Revenue = Price x Quantity Sold). This can be explained from the graph given below.
a) Rivals will not follow a price increase by one firm – therefore demand will be relatively elastic and a rise in price would lead to a fall in the total revenue of the firm b) Rivals are more likely to match a price fall by one firm to avoid a loss of market share. If this happens demand will be more inelastic and a fall in price will also lead to a fall in total revenue.
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Costs That Effect the Industry
High infrastructural costs To enter service areas, service provider incurs huge set up and infrastructural costs. These infrastructural costs to develop the service involve risks such as logistical risks, longer time duration to launch the service, setting up of new towers and dearth of highly skilled personnel to develop such infrastructures.
Allotment of spectrum by the Government
One of the major concerns of the industry is the availability of the spectrum that is used for the supply of the service. It is provided by the government and has been a controversial issue in recent times for this sector in India. Being a limited resource, it gives a possibility of unhealthy bidding by the service providers resulting in unviable financial approach to the price thus hampering the growth of highly competitive sector.
Regulation charges
Immense competition in the industry and high regulatory charges imposed by the government result in low tariffs by the providers. This indeed, makes it very difficult for the operating firms to impede smooth implementation of the projects. Following gives the information about the regulatory charges firms have to pay to the government. o
Regulatory charges
o
Service tax
o
License fees
o
Spectrum charges
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IDEA CELLULAR
Since, inception as Idea grew and evolved, it reinvented itself thrice.
Tagline/ Slogans
An idea can change your life
USP
Big brand with great service
Segment
Middle and upper middle class
Target Group
Students (majority out station), workers, labourers
Positioning Positioning
Smartness that comes with using Idea
In the wireless sector, Idea has excelled overtime; comparing the compounded annual growth rate (CAGR) Idea has outperformed the Industry growth. An increasing trend can be noticed over the financial years. There’s a drastic improvement in Revenue market share (RMS) with an incremental RMS of 26%.
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The above graph shows that idea has grown consistently in recent years and witnessed an incremental RMS (IRMS) as compared to other major telecom companies’ whose share keeps on fluctuating.
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In India there are 791mn users on mobile voice, 252mn have internet access, 233mn on mobile internet, and a market of 560mn is still untapped. With low fixed line penetration, mobile internet is their only way to get internet access and enter the digital era.
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STRATEGIES I.
Corporate Level Strategy Mergers & Acquisitions
Industry heading towards imminent consolidation
Should target smaller companies with synergies
Subscriber base linked to allocation of additional spectrum
Proposed M&A norms by TRAI to revise upward the minimum number of competitors to be present in each telecom circle.
Idea should consider gaining first mover advantage in consolidatio n.
Diversification – Broadband & IPTV
Broadband refers to telecommunication in which a wide band of frequencies is available to transmit information.
(Internet Internet Protocol TV) TV Also called "TV over IP" and "Internet TV," IPTV refers to the delivery of scheduled and video-on-demand (VOD) TV programs and movies over the mobile phones.
Positive Side: o
Broadband Penetration of 1% (11.21 million)
o
Government Plan to increase broadband connectivity like Bharat Nirman
o
60,000 km of fibre optic network can be leveraged for backhauling
Negative Side: o
High Capital expenditure costs - Last mile connectivity
o
Existing fixed line DSL – Easier to convert to Broadband rather than new provider
o
IPTV – Not enough bandwidth commissioned
Conclusion: Idea shouldn’t diversify into Broadband services.
Direct To Home
220 out of 370 million TV sets belong to low density rural areas
Synergize with telecom services for billing and customer support to the DTH
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Leverage powerful telecom brand and marketing campaign of “What an idea sirjee”
II.
Customer acquisition from the local cable operators
In-flight Wi-Fi – using use DTH infrastructure for the same
Business Level Strategy
Coopetition (cooperative competition)
Indus Towers
It’s a joint venture between Airtel, Idea and Vodafone
110,000 towers – world’s largest tower company founded in 2007
Aim was to decrease CapEx and Opex costs
3G Tie Tie--up
Airtel, Idea and Vodafone - sharing the 3G networks in the circles where they do not have licenses
′
Idea offering 3G services in Delhi, Kolkata via Vodafone’s n etwork ′
Vodafone offering 3G services in Andhra, Kerala through Idea’s network ′
Airtel offering 3G services in Gujarat through Idea’s network
Rural Penetration
Relative saturation of the Metros and Urban Areas - Urban Tele density for wireless subscribers is 150.06mn
Lower penetration in the rural areas – Rural Tele density for wireless subscribers is 32.75mn
The growth rate in the rural subscribers has been 48% and 71% over the last 2 years
Lower ARPU, increased CapEx and OpEx
Margins to be a result of the volumes rather than higher ARPU 20
FUNCTIONAL STRATEGIES
Operational •
Tower Infrastructure – Indus Towers into all 22 circles
•
Sharing of the backhaul infrastructure, pooling of resources
•
Outsourcing of the call center operations (English)
Financial: Financial Low Cost Debt Financing in International Markets
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CONCLUSION In the end to conclude we can say that the telecom industry in India operates in an Oligopoly Market Form. Idea is one of the leading companies of the Industry. This can be inferred from the following facts: •
There are a few companies operating. And of these few companies, 7 constitute 80% of the market and Idea being one of them.
•
All the companies like Airtel, Vodafone and Idea are interdependent on each other and influence the industry.
•
There are barriers to enter and exit the industry, like government regulations and licensing.
•
It’s a highly technology based Industry, and success and failure depends on the technology used.
•
All the companies provide homogeneous services.
•
They don’t indulge in Price Competition.
Thus all these points prove that Telecom Industry in India operates in an Oligopoly Market Form. And Idea is one of the leading companies of the industry.
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BIBLIOGRAPHY BIBLIOGRAPHY
Wikipedia
Investopedia
Investor Presentation Q2FY15 www.ideacellular.com
DD Chaturvedi, Managerial Economics
H. Gravelle, Microeconomics
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