ECONOMICS AND FINANCIAL MARKETS



Competition Policy issues associated with oligopolistic markets

Competition Policy issues associated with oligopolistic markets

Introduction

One of the major issues for the prospective introduction of broadband mobile services is the allocation method for frequency spectrum among different services. Since the inception of mobile telecommunications industry there is an ongoing fight for receiving adequate portions of the frequency spectrum (Calhoun, 1988). The mobile telecommunications industry demonstrated that it is consistently improving the spectrum efficiency of its services. This, along with the lowering of equipment costs provided room for drastic reductions in the cost of service. Firms thus captured an increasing number of customers. The popularity of mobile telecommunications services put on pressure for allocating more frequency spectrum. The mobile telecommunications industry has also been able to pay huge licence fees for frequency spectrum usage: this became a pervasive argument for allocating increasing amounts of spectrum to the industry.(Gruber,1999)

A key question of this paper concerns the effect of frequency spectrum scarcity on the market structure of mobile telecommunications. Tracking the history of the market structure of this industry gives some insights on this issue. (Gruber and Verboven ,2000) In the early days, mobile telecommunications was considered as a natural monopoly precisely because frequency spectrum availability was so scarce and the efficiency in using the spectrum resource was so poor.

Institutional background to the industry

Entry regulation is an important issue in telecommunications markets. The absence of competition in this industry has for a long time been defended by natural monopoly arguments, i.e. the presence of high fixed costs and the necessity for entrants to obtain access to the network of the incumbent. At least two factors have led to regulatory reform. First, there was a growing concern about the inefficiencies caused by monopolies(Gruber,1999) These inefficiencies include insufficient incentives to reduce costs and to innovate, distorted price structures and under-investment (as indicated by long waiting lists and poor service). Second, technological progress led to the belief that more than one firm could profitably operate in various segments of the telecommunications market.

The mobile telecommunications industry became the first major laboratory of competitive supply of telecommunications services. The effects of entry in the cellular mobile industry are therefore particularly interesting to analyse. The scarce resource to be allocated to the firms is the radio spectrum. Technological progress relaxes this constraint somewhat as it leads to greater efficiency in spectrum usage and thus increased service capacity. Governments throughout the world have taken quite different options regarding the timing and the number of licenses.

Most countries viewed cellular telecommunications as just an additional new business of the state-owned telecommunications monopoly. The development of the cellular network was a means of honing the innovative capabilities of national equipment suppliers. Initially only little frequency spectrum was allocated to mobile telecommunications. This was increased as spectrum efficiency of mobile telecommunications improved. Some technological features of the most widespread mobile telecommunications systems are summarised in Table 1. Analogue cellular mobile telecommunications started during the first half of the 1980 s, digital technologies such as GSM ...