Question

Asian-based telecom operator recently announced that it was launching Virgin Mobile as a new telecom brand within the country. It would operate in conjunction with Etisalat and Du. Assuming the trend continues, and the government opens the market for private and foreign players. You are required to – a. Apply your understanding and concepts from microeconomics, to investigate and summarize the major characteristics of the emerging market form (monopolistic competition) in the telecom industry. b. Describe and analyze the pricing policies that you would expect to find in this industry of telecom.

 

Answer 1

a. As the trend continues and more and more players enter the market, the market will move away from monopoly or oligopoly to monopolistic competition the characteristics of which are mentioned below:-

• Large no. of buyers and sellers- There are a large number of buyers in the telecom market and as they are very large in number, one cannot alone dictate the prices but they have to go with the market forces of demand. Similarly, there are large number of sellers but not as large as in perfect competition allowing them to have a limited control over their price as compared to buyers.
• Slightly differenciated products- In telecom industry, all the firms release various packages under various schemes, the fundamental work of which is data, connectivity, internet and talktime etc., which are differenciated on the basis of price,size,offers etc. This means that these products are close substitutes of each other which helps the firms to enjoy some monopoly power.
• Free entry and exit of firms- There is no restriction on entry and exit of firms. If the firms are earning abnormal profits in short run, then more firms will enter the market till all the firms start earning normal profits and if the firms are earning abnormal losses, then firms will exit the market till all the firms start earning normal profits.
• Level of knowledge- Both the sellers and buyers have incomplete knowledge about each other and thus prices are variable and uncertain.

b. Firms under such conditions try to maintain or increase their consumer base with the help of selling costs in the form of advertisements, attractive offers, aftersale services and aggressive pricing. The firms will try to stay away from price wars but also try to keep their profit margins lower in order to gain a large consumer base and maintain brand loyalty due to which it can be concluded that pricing would be competitive.