The Public Incumbent’s Defeat in Mobile Competition : Sequencing of Telecom Reform Yuntsai Chou Associate Professor Yuan Ze University ITS Europe Conference 9.18.2008
What’s the Problem of Reform?
The experience varies from country to country.
In most countries, the incumbent still possesses the dominance, especially in the fixed-line market, as well as the mobile one.
Market Share of BT vs. CHT
Examining Telecom Reforms
Privatization: to increase the firm’s efficiency and profitability
Competition: privatization without liberalization fails to improve performance.
Institutional re-arrangement :
the sequence of the reform (Newberry, Wallsten).
a). breaking up monopolies before privatization
b). establishing separate regulatory authorities prior to privatization
Interplay Between the Timing of Privatization and Competition Case 4 Privatized incumbent competing against entrants (lower expected returns from the private monopoly) Case 2 Private monopoly (higher expected returns from monopoly, and privatization is more likely to be successful) Privatized firm Case 3 Public incumbent competing against private entrants (lowest expected returns from the private monopoly due to competition and x-inefficiency) Case 1 Public monopoly State-owned enterprise Competitive market No competition
Taiwan as a Counter Example
The Latin American countries such as Argentina, Mexico, and Chile in the 1990s all opted for Case 2.
Many EU countries did not simultaneously introduce competition when selling the previous monopoly.
Taiwan’s regulatory authority opened the mobile market before CHT was privatized. Its market share plummeted as a result.
The Dilemma of State Ownership
1. Budgetary Constraints:
CHT was unable to adopt the most effective marketing strategy, free handsets , as all the other competitors did.
not until July 1999, the Congress approved the budget of handset subsidies.
2. The Dominant Carrier Constraints
Empirical Study of CHT’s Market Share
Data: monthly records from January 1997 to December 2004, totaling 96 observations.
1). Pricing factors: CHT’s monthly fee; CHT’s airtime charges; the rivals’ monthly fees; & the rivals’ airtime charges.
2). Policy constraint factors: all firms’ advertising expenditure; all firms’ handset subsidies expenditure & the price cap regulation
Model: error correction model (non-stationary time series data)
Econometric Results 0.0206 3 0.0463 2 Handset subsidies providing customers with instant incentives 0.0435 1 Changes in CHT’s handset subsidies (%) 0.4290 5 0.4038 4 Advertisement NOT providing customers with instant incentives 0.2558 3 Changes in CHT’s advertising expense (%) -.0100 5 -.0092 4 Customers waiting to compare CHT’s rate plans with those of the rivals -.0079 3 Changes in CHT’s monthly fee (%) Implication Estimated Coefficient Time Lag (month) Independent Variables
The Discussion on the Results
The estimation of handset subsidies is positive and significant
the most effective one at a one-or two-month lag.
CHT’s market share took just one or two months to rise after it started the discounted handsets along.
Unlike the reduced monthly rate and advertisement, the handset discount program could be more easily and quickly comprehended by customers.
The Discussion on the Results
rivals’ monthly fees: insignificant estimation on CHT’s market share.
Due to the rivals’ follower strategy.
CHT’s monthly fees : its market share increased as the lags grew, and the greatest effect occurred at a 5-month lag.
price cap regulation: insignificant estimation
advertisement expenditure: a delayed impact and was the most effective after a 5-month lag.
the Non-linear Effects of Handset Subsidies -3.21% -0.72% 0.15% Jan. 1998 Oct. 1999 Jun. 2000 Dec. 2001 1. CHT started its handset discount promotion (Oct. 1999) 2. CHT’s market share stopped falling and then turned to positive (Jun. 2000) 0.242803 Adjusted R-squared 0.301049 R-squared 0.0042 3.163616 0.014655 0.046361 *** (Handset subsidies)² 0.0041 -3.169960 6.159430 -19.5251 *** Handset subsidies 0.0037 3.218429 646.9945 2082.306 *** Constant P-value t-value SD Mean Variable
the (Non-linear) Effects of Handset Subsidies
Two critical points of fluctuation in CHT’s market share.
1). October 1999, the loss of its market share decreased from -3.21% to -0.72% per month.
2). June 2000, eight months after the program was implemented, CHT’s market share stopped falling and then turned to a positive growth rate.
The handset discount program is confirmed as the key factor in stopping CHT’s loss in market share and in actually reversing it.
Implication for the CHT Case
The handset subsidies instantly stimulated the demand for CHT’s services, while it took about five months for the other methods to take effect.
Public ownership forced CHT to meet the budgetary restraints. The firm thus was unable to offer customers free handsets during competition when others did.
many countries adopted the privatized monopoly approach in reform that results in a less competitive market.
The reform may not be entirely successful if their policymakers fail to specify the sequences .
privatization should only be executed after the entrants have consolidated the market share to a certain degree.