Name: Yang Xin

Class: 15S7J
Tutor: Miss Jenny Wang
Telecommunication Industry in Singapore

1. Explain the type of market structure telecommunication industry in Singapore operates in.
It is an oligopoly.

There are high barriers to entry as telecommunications industry is a highly capital intensive industry
which requires high start-up costs before the company can operate. Companies will have to invest
in high cost infrastructure such as satellites and airwaves. Although physical networks are owned by
IDA telecommunication companies will still have to set up mobile base stations around Singapore.
Research and development is also required at times to provide better quality services for the
consumers and there is a need for innovation in the market. Moreover, the government only grants
certain companies license to operate in Singapore. Therefore, there are only a few dominant firms
in the industry. In Singapore, there are three dominant firms in the fixed mobile and broadband
business- SingTel, M1 and Starhub in Singapore . Each company serve approximately one third of
the market with little price differentiation.

The product is slightly differentiated as all three firms provide the same services- including
home/mobile lines, mobile data, online networking and TV subscription plans. (Depends on type of
services-differentiate in service packages) Although each company may bundle the services
differently, they are providing the same type of mobile networking services.

Imperfect knowledge is present within the market as consumers are not fully aware of the actual
costs of providing a mobile plan. While the start-up costs may be high due to high costs of
technological investments such as satellites, the marginal cost of providing the service to each
additional consumer may be relatively low.

Lastly, there is mutual interdependence in the market as the decisions made by one firm is likely to
affect that of another company. Often, the three companies offer similar bundles priced similarly to
attract customers in the small and saturated market. Companies will usually follow the pricing of other
companies for the same services- for the 1Gbps broadband plan, shortly after My Republic offered a
price of $49.99, the other companies followed with M1 offering the same plan at $49 while Singtel
and Starhub both reduced prices to S69.90.

2. How did the telecommunication companies compete against each other?

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PRICE COMPETITION (but it is not sustainable, and hence not preferred)- In 2015, the
telecommunication companies had launched a price war against each other by lowering the prices
of 1Gpbs broadband plans which was started by MyRepublic to $49.99. the other companies followed
with M1 offering the same plan at $49 while Singtel and Starhub both reduced prices to S69.90. This
occurred as the firms tried to undercut each others prices and attract more consumers as the market
for mobile networks in Singapore is saturated and small. This is because in an oligopolistic market,
prices tend to be relatively rigid due to the kinked demand curve theory. In a competitive oligopoly,
firms will match price decreases initiated by another firm so as to prevent loss of theirs customers
and preserve market share. If the other firms do not decrease prices to match the price cut, they will
experience a more than proportionate fall in quantity demanded and if marginal cost has no significant
change, it will result in a fall in total revenue. Hence, price wars occur in the oligopoly.

PRODUCT DEVELOPMENT- In general, the companies compete in the form of innovation in the
services provided which is a form of non-price competition and a form of real product differentiation.
The telecommunication companies will usually offer similar mobile networks and innovate to provide
more attractive plans to attract consumers. For example, when Starhub first entered the industry, it
introduced per second charges on outgoing calls when the industry was charging by minute. They
also introduced free incoming calls while charging the calling party for airtime. This is usually followed
by the other telecommunication parties.

PRODUCT PROMOTION- The firms usually advertise as a form of imaginary product differentiation
on many media platforms such as traditional print media on newspaper as well as at public spaces
such as advertising on MRT. However, with the rise of internet and social media, firms are also more
creative with their advertising on platforms such as Youtube, Instagram or Twitter. This is to create
brand loyalty so that consumers feel that there are no close substitutes and will not be willing to
purchase services from rival firms.
In general this will make the demand for the firm's services more price inelastic as no close substitutes
are available in the market. This will increase demand of their services and thus increase revenue for
the firm.

3. Why did IDA consider to "rejuvenate the market"? How does it intend to do so?
As the current market is dominated by three firms, there is lack of competition and innovation in terms
of services as the companies tend to only engage in non-price competition such as advertising
which is imaginary, there is lack of incentive to innovate since market share of the companies
are remains stagnant/ unchanged and the firms can earn supernormal profits in the long run. Also,
there is allocative inefficiency as the profit maximisation will be at MC=MR where MC is rising. As
such price will be larger than marginal cost, causing social welfare to not be maximised.

As such, to benefit consumers by improving actual quality of services, IDA decided to introduce a
fourth telecommunication company to spur competition in the market. IDA will focus on mobile
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virtual network operators (MVNOs) as the high cost of physical networks and airwaves have been a
deterrent. To do so, it will provide heavy subsidy by providing the mobile airwave at $40million,
60% lower than normal reserve price of $100 million. The proposal also includes proving lower
band frequencies of 700MHz to 900MHz as it will provide a major change allowing the fourth mobile
operator to deliver fast mobile internet with wider and better coverage. This lowers the barriers to
entry for new firms. Additional spectrum will also be available for bidding by existing
telecommunication companies.

4. With reference to the current context, do you think greater competition in Singapore
telecommunication industry is beneficial?
Currently, given that prices of mobile plans tend to be similar from all three companies due to the
price rigidity in oligopolistic market structures and the firms tend to follow the prices adopted by other
firms. (Certain resemblance to tacit collusion- price leadership theory as to avoid price competition
and follow pricing policy of another firm that is adept at reading market conditions) Furthermore, the
current methods of competition between incumbent firms such as the price war which was initiated
last year by the major telecommunication companies were not sustainable in the long run as quality
and services would be negatively affected. Hence, it will be beneficial to increase competition in the
market.
Firstly, the introduction of competition into the market will definitely increase the dynamic efficiency
of current producers. Producers will not be complacent due to the current market shares they are
holding and have the incentive to innovate to develop their products so as to make their services
more differentiated. Demand for their services will become more price inelastic. For example, the
entry of more players into the market in the past 4 years have caused fibre broadband prices to be
halved and surfing speeds increased by 20 times. With increased competition, telecommunication
companies will have greater incentive to innovate and consumer can benefit from better quality
services such as faster indoor surfing.
Moreover, Singapores mobile network market is small and saturated, it would be hard for the new
entrant to compete against the established firms and attract sufficient customers. As such, it is of
imperative to firms to develop niche areas and remain productively efficient to minimise costs.
For example, Singtel is currently aiming to be the key player in the digital business market as it has
high growth potential. Their annual report revealed that digital marketing, premium OTT (over the top)
video and advanced analytics were identified as key growth areas. At the same time, OMGTel aims
to increase their market share by providing lowered roaming charges and better network quality. As
such, should it become the fourth telecommunication operator, it would definitely increase
competition, allowing for lowered prices for consumers as the firms aim to lower costs of production.
This can reduce X-inefficiency in the industry as firms will seek lowest possible cost of production
to remain competitive in the market. As such consumers can benefit from lower prices as costs is
minimised.
With the new entrant into the market, the allocative inefficiency in the market can be reduced.
The fourth telco can reduce the monopoly power of the three current firms, and demand for services
from these firms may fall, making it more price elastic since more substitutes are available. The
difference between price and marginal cost will be smaller and there will be smaller
deadweight welfare loss. Allocative inefficiency may not be as severe and consumer surplus will
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increase. Thus society will gain from the increase in competition. As such, the increased
competition will be beneficial to bring about more dynamic, productive and allocative
efficiency, ensuring better quality services with lowered prices for consumers.
Nevertheless, it may not be as beneficial in the short run as consumers are locked into long term
contracts. Hence, it is useful to implement regulatory measures to lower switching costs or termination
fees.
In addition, firms may not be able to fully enjoy substantial internal EOS experienced by the firms with
large market share as they can spread the high cost of infrastructure and innovation over a large
output. With the new entrant, demand for each firms services may fall and this can result in a higher
average cost for firms. Market not large enough to support too many firms in Singapore, as a
result in rise of average costs, producers may end up charging higher prices to consumers
instead to cover costs. For example, in the hotly contested 900MHz frequency range which IDA
plans to release for auction, losing the rights of this space could increase the amount of equipment
the telcos require by at least 20%. These extra costs depend on factors such as equipment
pricing and rents on sites where the additional hardware needs to be installed. Singtel as well
as M1 feels that IDA's recommendations will disrupt the market by allocating scarce resources to a
new entrant just to increase competition. This may not be in best interest of consumers as
eventually the produces will pass the higher average fixed and variable cost changes to the
consumers.

Furthermore, SingTel, Starhub and M1 are established firms so there is a degree of customer
loyalty to the respective firms. It may make it more difficult for the new entrant to compete
given the small saturated market and harder to develop a niche area to attract customers.
Therefore, there are limitations to how far the consumers can actually benefit from the new
telecommunication company to be introduced.
In conclusion, there are limitations to the extent to which consumers can benefit from more
competition in the telecommunication market, mainly due to the small market in Singapore which
hinders firms from fully reaping the internal economies of scale. However, in the long run, the higher
incentive to achieve dynamic and productive efficiency will allow firms to seek lower methods of
production, eventually reducing prices charged to consumers. Consumers can also enjoy better
quality of services through product development. With greater allocative efficiency, there will be gain
in societal welfare ultimately benefiting consumers.

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