LN09: Telecom Economics

EEE 452: Engineering Economics and

Management
Md. Naqib Imtiaz Hussain

Source: Wiki, IOSA by Jeffery Church, btrc.gov.bd

 Points to Ponder
• Imagine, there were only four private
universities in Bangladesh..
– Would it be good for students?
– What would it do to the quality of education?
– What effect would it have on various fees?
• How many private universities is too many?
– Is there a limit?
– Does this generate competition?
– What is the type of competition?
 Points to Ponder
• For private university
– Students are products or customers?
– Faculty research is a product of a by-product?
– How do graduates of an university affect universities’
status? What about business prospect?
• What if there are only a handful of universities?
– Is there a natural tendency to form a oligarchy
– What is the level of UGC regulation (GoB) necessary
– How much of regulation is too much?
 Insights To Gain
• By the next couple of the lectures you should
gain enough insights to be able to
independently ponder these questions.
 BD Telco History
• 1853 : Telegraph branch under Posts and
Telegraph Department, British India.
• 1971 : Reconstructed as Bangladesh Telegraph
and Telephone Department under Ministry of
Posts and Telecommunications.
• 1975 : Reconstructed as Telegraph and Telephone
Board.
• 1979 : Reconstructed as Bangladesh Telegraph
and Telephone Board (BTTB) with right to issue
license for telecom and wireless services.
• 1981 : Digital Telex Exchange in Bangladesh
 BD Telco History
• 1983 : Automatic Digital ITX started in Dhaka.
• 1985 : Coinbox Telephone service introduced in
Bangladesh by BTTB.
• 1989 : GENTEX Telegraph messaging service introduced
in Bangladesh.
• 1989 : Bangladesh Rural Telecom Authority got license
to operate exchanges in 200 upazilla.
• 1989 : Sheba Telecom got license to operate exchange
is 199 upazilla.
• 1989 : Cellular mobile phone company Pacific
Bangladesh Telephone Limited and Bangladesh
Telecom got license.
 BD Telco History
• 1995 : Card Telephone service introduced in
Bangladesh by BTTB and TSS.
• 1995 : Regulatory power of BTTB transferred to
Ministry (MoPT).
• 1995 : 2nd and 3rd ITX installed in Dhaka.
• 1996 : GrameenPhone got cellular mobile
Telephone license.
• 1996 : Telecom Malaysia International
Bangladesh got cellular mobile license.
• 1998 : Telecom Policy.
 BD Telco History
• 2000 : Global Telecom Service (GTS) Telex
Exchange venture with British Telecom.
• 2001 : Telecommunication Act, to establish
Bangladesh Telecommunication Regulatory
Commission (BTRC).
• 2002 : ICT Policy.
• 2004 : Teletalk cellular mobile launched.
• 2005 : Egypt-based Orascom acquired Sheba
Telecom
• 2006 : NGN introduced in BTTB.
 BD Telco History
• 2008 : BTTB converted into Bangladesh
Telecommunications Company Limited (BTCL) with
100% shares owned by Government. The Submarine
Cable Project transformed into Bangladesh Submarine
Cable Company Limited (BSCCL)
• 2008 : Japanese NTT DoCoMo bought 30 percent stake
in Aktel
• 2009 : Bharti Airtel acquired 70 percent stake in Warid
Telecom
• 2009 : Internet Protocol Telephony Service Provider
(IPTSP) Operators launched.
 BD Telco History
• 2010 : Aktel rebranded to Robi Axiata Limited
• 2012 : 3G mobile service is introduced by state owned
Teletalk in October.
• 2013 : 3G auction held for private companies
• 2014 : 64 districts covered with 3G by Teletalk
Grameenphone, Banglalink and Robi
• 2016: Robi and Airtel were merged on November 16,
2016 and Robi set sail as the merged company.
• 2018 : 4G auction held for private companies
• 2018 : on 19 February 4G mobile service is introduced
Mobile Telco BD Market
SUBSCRIBER (IN MILLIONS)

3.757, 2%

GP

33.346, 22% Robi

68.594, 46%
BL

Teletalk
45.029, 30%

Source: BTRC as of May 2018

Current Inter connection
 Ops in Numbers!
• International Gateway (IGW)
– Total 30 providers !
• Interconnection Exchange (ICX)
– Total 28 providers!
• International Internet Gateway (IIG)
– Total 28 providers!
 Ops in Numbers!
• IP Telephony Service Providers (IPTSP)
– Total 40 providers!
• International Terrestrial Cable (ITC)
– Total 6 providers!
• Mobile operators
– Total 4 providers!

OMG! I can do tha…. Sure….

 Current Status of Service
• How much is your per month telco bill?
• How much do you pay for mobile data?
• Do you carry multiple numbers?
• Which one is good for what service?
• How’s the status of Value Added Services
(VAS)
– How much do they cost?
– How much do you make use of them?
 GP air time strategy
• Is GP pushing towards monopoly?
 Lecture Outline
• Network Effect
– Natural monopoly?
• Oligopoly in market
• Oligopoly in telco market
 Network Effect
• Also called network externality or demand-
side economies of scale
• Its the positive effect described that an
additional user of a good or service has on the
value of that product to others.
• When a network effect is present, the value of
a product or service increases according to the
number of others using it.
 Examples
• Telecom service
– Internet services
– Mobile, PSTN
• Social networking services,
– FB, Twitter, Instagram, Linkedin
• Software usage,
– MS office suite, App store (iTunes, Google Play)
• Web platforms
– eBay, Bikroy.com
 Oligopoly
• Oligopoly is a market form wherein a market
or industry is dominated by a small number of
large sellers (oligopolists). Oligopolies can
result from various forms of collusion which
reduce competition and lead to higher prices
for consumers. Oligopoly has its own market
structure.
 Nature of Oligopoly
• With few sellers, each oligopolist is likely to be
aware of the actions of the others.
• the decisions of one firm influence and are
influenced by decisions of other firms. Strategic
planning by oligopolists needs to take into
account the likely responses of the other market.
• Entry barriers include high investment
requirements, strong consumer loyalty for
existing brands and economics of scale.
 Oligopoly in Numbers
• As a quantitative description of oligopoly, the
four-firm concentration ratio is often utilized.
This measure expresses, as a percentage, the
market share of the four largest firms in any
particular industry.
 Repercussions of Oligopoly 1
• Oligopolistic competition can give rise to both wide-
ranging and diverse outcomes. In some situations,
particular companies may employ restrictive trade
practices (collusion, market sharing etc.) in order to
inflate prices and restrict production in much the same
way that a monopoly does. Whenever there is a formal
agreement for such collusion, between companies that
usually compete with one another, this practice is
known as a cartel. A prime example of such a cartel is
OPEC, which has a profound influence on the
international price of oil.
 Repercussions of Oligopoly 2
• Firms often collude in an attempt to stabilize
unstable markets, so as to reduce the risks
inherent in these markets for investment and
product development. There are legal restrictions
on such collusion in most countries. There does
not have to be a formal agreement for collusion
to take place (although for the act to be illegal
there must be actual communication between
companies)–for example, in some industries
there may be an acknowledged market leader
which informally sets prices to which other
producers respond, known as price leadership
 Repercussions of Oligopoly 3
• In other situations, competition between
sellers in an oligopoly can be fierce, with
relatively low prices and high production. This
could lead to an efficient outcome
approaching perfect competition. The
competition in an oligopoly can be greater
when there are more firms in an industry than
if, for example, the firms were only regionally
based and did not compete directly with each
other.
 Characteristics
• Profit maximization effort
• Ability to set price
• High entry and exit barriers
• Only a handful of few operators / entities
• Long run profits
– Can retain long run abnormal profit
• Perfect knowledge
– Seller got perfect knowledge (price , cost, demand),
– buyers are ignorant
 Characteristics
• Interdependence
– Like playing chess
– Anticipate more moves by one player
– One telco product is competed by other

• Non-price competition
– Loyalty scheme, ad, prod -differentiation
 Looking Back at Telcos
• Its may be impossible to have significantly
large numbers of Telcos due to
– Network externalities
– Economy of scale
• Does that mean that people will have to take
brunt of living with purely oligopolistic rule?
• Is it possible to attain efficiency in service
while making sure that the economies of scale
is not lost?
 Looking Back at Telcos
• Since only 4 Telco s serve the whole nation
each ones decision affect the other.
• One Telco’s lowering price will stimulate other
to lower price too in retaliation
– that’s good for people
– What if, it enforces the weaker players loose
ground and leave the market?
• But what if, they collude?
– Prices go higher, loss of quality and efficiency.
 Why looking at Telcos?
• Impact of Telco is big on GDP and growth

Source:GSMA
 How to Telcos Compete?
• How to they compete?
– What is static model
– What is dynamic model ?
– What kind of game do they play?
• Is it possible to make policies that they all
resort to fair competition?
• Why do we need competition?
Why Competition?
• General benefits of
competitions
– Lowers price
– Improves quality
– Improves distribution
– Expands supply
• Therefore, we need
more competition
• Remove unfairness
 Game theory for Telco
• To understand Telco’s competition and
business
– Game theory
– Nash Equilibrium
– Cournot Equilibrium
 Game Theory: Prisoner’s Dilemma
• Two members of a criminal gang are arrested and imprisoned. Each
prisoner is in solitary confinement with no means of
communicating with the other. The prosecutors lack sufficient
evidence to convict the pair on the principal charge, but they have
enough to convict both on a lesser charge. Simultaneously, the
prosecutors offer each prisoner a bargain. Each prisoner is given the
opportunity either to betray the other by testifying that the other
committed the crime, or to cooperate with the other by remaining
silent. The offer is:
• If A and B each betray the other, each of them serves two years in
prison
• If A betrays B but B remains silent, A will be set free and B will serve
three years in prison (and vice versa)
• If A and B both remain silent, both of them will only serve one year
in prison (on the lesser charge).
 What will they do?
• Watch the video
• https://www.youtube.com/watch?v=t9Lo2fgx
WHw
 Nash Equilibrium
• Two or more players in which each player is
assumed to know the equilibrium strategies of
the other players, and no player has anything
to gain by changing only their own strategy. If
each player has chosen a strategy and no
player can benefit by changing strategies
while the other players keep theirs
unchanged, then the current set of strategy
choices and the corresponding payoffs
constitutes a Nash equilibrium.
 Cournot Equilibrium
• An economic model used to describe an
industry structure in which companies
compete on the amount of output they will
produce, which they decide on independently
of each other and at the same time.

https://en.wikipedia.org/wiki/Cournot_competition
 Comparison of models
• Static oligopoly models have the same
structure as the Prisoners’ Dilemma.
• But Telco’s engage in dynamic competition
 Dynamic Games
• For many important economic applications we need to
think of the game as being played over a number of
time periods, making it dynamic.
• A game can be dynamic for two reasons.
– First, the interaction between players may itself be
inherently dynamic. In this situation players are able to
observe the actions of other players before deciding upon
their optimal response. In contrast static games are ones
where we can think of players making their moves
simultaneously.
– Second, a game is dynamic if a one-off game is repeated a
number of times, and players observe the outcome of
previous games before playing later games.
 Story: Ransom
• A 1996 movie demonstrates example of dynamic game.
• Tom’s son was kidnapped, a $2 million ransom was sought.
• After a failed effort pay the ransom and get his son back, Tom
realizes that paying ransom will not help return his son.
• Therefore, he broadcasts publicly that he would pay anyone
how brings his son unharmed with kidnappers dead or alive.
• This creates diversion among the kidnappers
• One of the kidnappers, a bad police officer, kills the other
accomplices and brings the boy to safety
Story: Real Situation
 Characteristics of Dynamic Game
• The credibility of threats is the key issue in
dynamic games.
• Only threats that are credible will influence
the behavior of rational agents.
 Dynamic Games
• Dynamic games are defined by their extensive
form, which is usefully presented as a game
tree. A game tree shows the decision nodes of
each player, the information set in which they
make each decision, and the payoffs to the
players at the terminal nodes.
Decision Nodes: Decision nodes indicate a
player’s turn to move. The number inside a
decision node indicates whose turn it is to
move. In the game in Figure 9.1, there are
three
decision nodes, one for player 1 and two for
player 2.
Branches: Branches emanate from decision
nodes. Each branch corresponds to an action
available to a player at that node. The label for
a branch corresponds to its action. Player 1 has
available the set of actions {u, d} at its node.
Player 2 has the set of choices {U, D} at both of
its nodes. However, in general we might expect
that different nodes for the same player might
have different sets of actions
Terminal Nodes: The terminal nodes are the solid circles. These indicate that the
game is finished. Beside each terminal node are the payoffs for the two players if
that node is reached. The convention is that the first number is the payoff of the
player who moved first. If player 1 goes u and player 2 goes D, then the payoff to
player 1 is 1 and to player 2, 0.
 Imperfection is reality
• A game of imperfect information is one in
which at least one player does not know the
previous moves of all the other players when
she makes her own move.
 Strategy in Games
• A strategy is a list of actions to be taken for
every feasible information set, i.e., for all
possible permutations of previous moves.

Vs
 EU Raiding Mobile Telco
• Thursday July 12 ,2001
• EU anti trust police raided 4 major players in
UK
– Vodafone, Orange, BT Cellnet, One2One and their
German counterparts have been colluding to fix
the prices that subscribers are charged for
"roaming", using other operators' networks to
make and receive calls when abroad.

https://www.independent.co.uk/news/world/europe/mobile-companies-are-raided-
over-price-collusion-9131276.html
 What is collusion?
• Collusion refers to conduct by firms to
coordinate their behavior, typically to raise
prices, reduce output, and realize greater
profits.
• Successful collusion requires that firms reach
an agreement over the collusive output or
price and can credibly enforce the agreement
 When colluded..
• The profit-possibility frontier identifies the set
of efficient agreements. From the perspective
of the firms in an industry, it is the set of
Pareto-efficient profit allocations. The shape
of the profit-possibilities frontier depends on
returns to scale.
 When colluded..
• The profitability of collusion depends on the
increase in market power from coordinated
behavior.
• The increase in market power from collusion
depends on the market elasticity of demand,
the relative number and size of firms
participating in the agreement, and the extent
of entry barriers.
 When to they Collude
• Firms engage in explicit collusion when they mutually
devise a common course of action
– The collusive agreement—and
– exchange mutual assurances to implement that course of
action.
• A group of firms that engage in explicit collusion is often
called a cartel.
• Firms engage in tacit collusion when they are able to
coordinate their behavior by simply observing and
responding to the pricing behavior of their rivals.
• The Nash equilibrium in a dynamic game may result in a
greater degree of coordination and higher prices than in a
static game.
 Terms of collusion
• The terms of the collusive agreement will
imply a division of profits between
participating firms.
• The collusive agreement reached will depend
on the bargaining power of firms in an
industry.
 What hinders collusion?
• Factors that complicate reaching an
agreement include legal prohibitions, cost
asymmetries, product heterogeneity,
innovation, incomplete information,
uncertainty, asymmetries in preferences,
industry social structure, seller concentration,
and the scope for firm enforcement.
 But.. They’d still collude..!
• The impact of these factors is that firms may
use simple coordinating rules to implement
second-best agreements.
 Colluding Firms enforce..!
• The scope for enforcement depends on the
detection and punishment of firms that cheat
on the agreement.
• The stronger, swifter, and more certain
punishment, the more likely the joint profit-
maximizing outcome will be sustainable or the
more profitable the collusive agreement.
 Sustainability of collusion
• Factors that determine the sustainability of
collusion are public prices and the possibility of
secret price cuts, the number of firms involved in
the agreement, the frequency and size of orders,
extent of product differentiation, cost conditions
and capacity utilization, elasticity of firm demand,
and extent of multimarket contact.
• These factors affect the sustainability of collusion
through their effect on the strength, speed, and
certainty of punishment.
 How collusion facilitated
• Facilitating practices promote collusion through
their effect on the strength, speed, and certainty
of punishment and/or by reducing the difficulties
associated with reaching an agreement.
• Practices that potentially facilitate collusion are
agreements to exchange information, trade
associations, advance notice of price changes and
price leadership, most-favored-nation or -
customer clauses, meeting-competition clauses,
multiproduct formula pricing, delivered pricing,
and resale price maintenance
 How to protect people?
• Provide policy that encourages Dynamic Nash
Equilibrium