You are on page 1of 23

Case Study

On
Mobile Telephony in India

license fee for mobile subscribers


Introduction
during 1995
Incoming and outgoing rates at 8/min
and 16/min respectively
Introduction of new telecom policy by
Government
Mobile phones replacing fixed
handsets

MAJOR DETERMINANTS IN AFFECTING


MOBILE TELEPHONY INDUSTRY

Basic relation between price


and demand.

Own price elasticity.


Income elasticity of demand.
Cross elasticity of demand.
Price elasticity of demand with
respect to revenue.

Price Demand Relation

Objectives
To understand the concept of elasticity of demand & discuss various types of
elasticity of demand.
To understand the link between price elasticity of demand, revenue and
business decision.

Facts of the case


Revolution & Growth in
Mobile Telecom Industry
1. Government Imposing a
Heavy License Fee
2. Introduction of New Mobile
Telecom Policy
3. Mobile Phones Affecting
Subscribers Base of Fixed
Phones
4. Growth of Telecom Industry
from 1999 to 2015

Declining Call Rates


1. Growing Rate of Subscribers is Driven by Cheap Call Rates
2. Mobile Carriers Shifting their Focus to Mass Market
3. One of the Lowest Call Tariffs in World
4. Dominant Players are Airtel, Vodafone, Reliance & Idea

Analysis
1. Price and Cross Elasticity
Price elasticity of demand is a measure used in economics to
show responsiveness or elasticity of the quantity demanded
of a good to a change in price.
Year

Quantity
(in millions)

Price

2005-06

32

2000

2006-07

60

1500

2007-08

1000

PED= -500/3500*46/28 = - 0.235


PED is negative which shows an inverse relationship
between price and quantity demanded.

Quantity
Demanded

50

30

1500

2000

Price

Factors influencing PED


Availability of substitutes
Degree of necessity or luxury
Proportion of income required by the item
Time period

Cross price elasticity of demand


Cross-price elasticity of demand measures the responsiveness of the

demand for a good to a change in the price of another good. It is measured as


the percentage change in demand for the first good that occurs in response to
a percentage change in price of the second good.
Year

Mobile Phone
(in millions)

Fixed Phone
(in millions)

2005

32

0.40

2006

60

0.25

Two goods that complement each other show a negative cross


Qx

elasticity of demand as price of good Y rises the demand for


good X falls.
Qx

Py

Two goods that are substitutes have a positive CED as the price
of good Y rises the demand for good X rises.

Py

2. Income and Demand Elasticity


The concept of income elasticity of demands (E y) expresses the
responsiveness of a consumers demand (or expenditure or consumption) for
any good to the change in his income.

It may be defined as the ratio of percentage change in the quantity


demanded of a commodity to the percentage change in income.

The coefficient E

may be positive, negative or zero depending upon the nature of a

commodity.

If an increase in income leads to an increased demand for a commodity, the income

elasticity coefficient (Ey) is positive. A commodity whose income elasticity is positive is


a normal good.

On the other hand, if an increase in income leads to a fall in the demand for a

commodity; its income elasticity coefficient (E y) is negative. Such a commodity is called


inferior good.

If the quantity of a commodity purchased remains unchanged regardless of the change


in income, the income elasticity of demand is zero (E y = 0).

Normal goods are of three types: necessaries, luxuries and comforts. In the case of
luxuries, the coefficient of income elasticity is positive but high, E y> 1.

In the case of necessities, the coefficient of income elasticity is positive but


low, Ey< 1. . Income elasticity of demand is low when the demand for a
commodity rises less than proportionate to the rise in the income.

In the case of comforts, the coefficient of income elasticity is unity (E

= 1)

when the demand for a commodity rises in the same proportion as the
increase in income.

The coefficient of income elasticity of demand in the case of inferior goods is


negative. In the case of an inferior good, the consumer will reduce his
purchases of it, when his income increases.

If with increase in income, the quantity demanded remains unchanged, the


coefficient of income elasticity, EY = 0.

In the beginning of

2005 by the rise of the income, Indian customers started


demanding for stylish phones. The trend continued over the years and in 2008 it
was reported that Indians were wishing to be seen with smart mobile phone

In Jan. 2009, Vodafone

estimate showed that demand for mobile phones is


positively corelated with an increase in income.

The income elasticity of demand for mobile phones was estimated to be 2.45^5
and this made mobile phone a luxury in the technical sense of economics.

A study using household sample data from karnataka, however found out that a
rise in the monthl household income of households by 5% increases mobile
phone services to the extent of 0.638% which makes mobile phone a necessity
good rather than a luxury good.

3. Relationship between
Total Revenue
&
Price Elasticity of Demand

E>1

TR

Relation with Demand


Trend Showing Annual Increase in Demand In Mobile Subscribers In India Since 2002
250

200

150

Additional Users in Millions

100

50

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-50
Years

Relation with Supply


40
35

1.

2.
3.

The quantity supplied is


the number of units that
seller wants to sell over a
specified period of time
at a particular price.
There exists a positive
relation between quantity
and price.
The law of supply.

30
25
20
15
10
5
0
1

3
PRICE

4
QUANTITY

PRICE

QUANTITY

10

15

13

25

20

35

Analyses of the case


in Relation with
Supply Analysis
How it is related with the case ?
How it benefited the consumers ?
How it benefited the producers ?

What Went Wrong?


High tariff rates
Potential entry of new competitors
Bargaining power of suppliers

How
It
Went
Wrong?

N
O

L
C

N
O
I
S
U