Question

1. The Telecommunications Regulatory Authority (TRA) is the UAE’s independent industry regulator. Since its launch in 1976, Etisalat has held a monopoly in the market. That changed in 2006 with the emergence of du, which was awarded a 20-year concession to operate fixed-line, wireless, internet and international telecoms services. UAE-based telecom operator recently announced that it was launching Virgin Mobile as a new telecom brand within the country. Assuming the trend continues and the government opens the market for more private and foreign players. You are required to –
   1. Apply your understanding and concepts from microeconomics, to investigate and summarize the major characteristics of the emerging market form in the telecom industry.
   2. Describe and analyze the pricing policies that you would expect to find in this industry.
   3. Explain the profit maximization strategy of this market form with the help of a suitable graph.

Answer 1

Telecom market is going towrads Oligopoly from monopoly. Oligopoly has 2-10 players in the market.

Telecom market has similar and identical products. When a clear oilgopoly will be set then all firms will compete extensively and there may be price wars which is happening in telecom markets in India.

UAE is all set to follow Indian example where intense price wars, high level of adverising will be followed.

a. As already explained market is going towards oligopoly. It will have following features.

i. Price making companies. ii. Intense advertsisments. iii. similar and identical services by all service providers. iv. Data wars between companies.

b. It is clear that price wars are likely to happen as every company will aim at getting more market share and aquire new customers. however, it may also happen that existing firms may collude with each other and decide common price policy. TRA in UAE will have to intervene and stop these practices then.

c. Oligopoly firms have a kinked demand curve if they are colliding with each other and it may become monopoly if they collude. When one firm decreases the price then other firms also have to decreaes. However, when a firm increases it then other firms may not follow. Therefore demand curve is kinked.

Profits will depend on number of customers and average revenue per user. Generally telecom markets have longer period of returns period.

As shown in following figure if firms collude then second profit strategy will be followed. Prices charged will be Pq and Q\piquantity will be produced. Highlighted part shws profit.

When firms will not collude and compete freely then kinked demand curve will be followed and price wars will be intense.