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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