Market concentration in Bangladesh
Monday, 25 May 2009
M. A. Yusuf and Dr. Quamrul Alam
DESPITE the presence of multiple operators, the mobile phone users were deprived of lower tariffs, a natural outcome of competitive market until 2003-04. The industry structure and the resultant cooperative behaviour (instead of competition) among operators combined with poor regulatory role are often considered responsible for sub-optimal competitive outcome. Before Teletalk and Banglalink's launching of mobile phone service, GrameenPhone (GP) was the dominant firm. GP is still the dominant operator although it lost its market in the last two to three years to its rival operators.
It is widely known that the telecommunications regulator was mostly ineffective until 2006. Weak regulatory regime seems to be largely responsible for the sub-optimal competitive outcome (i.e. high tariffs and poor quality of service) To identify if industry structure has played any role in denying liberalisation benefits (lower tariff and better service) to mobile phone users, an examination of the market concentration of the industry is necessary. One of the most used methods in determining industry structure (i.e. concentrated market or non-concentrated market) is the Herfindahl-Hirschman Index (HHI). HHI can be measured using the market share of the operators in the industry. Using the market share of different operators for 2004 (63%, 25%, 2% and 10% for GP, AKTEL, Sheba and Citycell), Herfindahl Hirschman Index for mobile phone industry of Bangladesh was found to be 4698.
HHI is a commonly accepted measure of market concentration and extensively used by the US Department of Justice (DOJ) in assessing the impact of merger and acquisition on the competitiveness of a particular sector. Market concentration is also important to assess the intensity of competition in a particular industry. As per this measure, a market is considered a concentrated one when HHI is above 1800. A market is un-concentrated when HHI is less than 1000. As HHI of Bangladesh Mobile Phone industry is much higher than 1800, the industry is a highly concentrated one. However, it is not unusual for network industries. Mobile phone markets are mostly concentrated, involving two, three or five operators only. The matter of concern is that the Bangladesh market is more concentrated than many other countries as measured by HHI index and the impact it had on the competitive outcome of the industry. HHI of Bangladesh, Singapore, Australia, UK and HK are 4698, 3736, 3487, 2504 and 1936 respectively.
Market concentration is a critical determinant of competitive behaviour. Concentration facilitates coordination (and even collusion) instead of competition among the firms in the industry. In other words, concentration reduces overall rivalry. It seems that the high level of concentration in the mobile phone industry has dampened competition in the sector. The concentrated mobile phone market resulted in coordination and collusive behaviour among mobile providers. The mobile phone subscribers had to pay high call charge because of tacit collusive arrangement among the four private mobile operators (Kibria, 2005). Stable and similar tariff structures of the operators are suggestive of tacit collusion.
Moreover, the dominant operator did not share the benefits of economies of scale it had gained from concentrated share (market share) holding. The adverse consequences of concentrated market due to the possibility of abuse of a dominant position by the market leader (which was the case in Bangladesh before the arrival of Banglalink) were not seen to be the major concerns of the telecom regulator. It seems, mobile telecom operators were absolutely unconstrained (until 2003/04) in making their business practices in Bangladesh no matter how the business practices look like -- fair or not fair.
In order to remove the adverse consequences of the concentrated market, policy makers may consider some policy measures to promote effective competition in the sector. Adoption of 'Asymmetric Regulation' could be such policy measures in this regard. This type of regulation provides greater advantages to new entrants and places more stringent regulations on dominant firms. As part of such measures, the interconnection fee that the new entrants pay to the incumbent can be fixed close to the cost of termination on the incumbent's network, providing the advantage of economies of scale (Kim and Yoon, 2004).In contrast, the incumbent's equivalent fee to the entrants' network can be arranged to represent the higher cost of termination on the entrants' networks. Such regulations are found in practice. In Korea, a retail price regulation has been imposed on SK Telecom to ensure cost-oriented access charges on termination (for interconnection) with a view to benefiting new entrants.
Another strategy could be to exercise price control over the incumbent dominant firm by not allowing it to cut prices below the regulated level in response to the entry of new firms. With a view to applying the strategy, BTRC -- the regulator in the telecom sector -- could specify explicitly the definition of dominant firm (such as quantitative thresholds in terms of market share) in various markets and assess whether any incumbent firms hold and abuse market power. The Telecommunications Authority of Hong Kong has explicitly set out the meaning of dominant firm and adopted the policy of price control on the dominant firm in order to help new firms gain market share quickly (Chen and Lyn, 2002). Placing obligations on the dominant firm to share its telecommunication infrastructure such as Base Transceiver Stations (BTS), towers, space, poles and co-location on principle of non-discrimination and cost-orientation with other operators may be a good policy direction to foster competition and reduce entry barrier for new entrants.
The consolidation of the sector through merger and acquisition may help reduce the market concentration and dominance of a single firm. This is because the proposed merger of Banglalink and AKTEL is expected to create a giant mobile firm, capable of challenging the dominant GP (The Financial Express, 21 May, 2009). This would definitely help change the competitive landscape of the mobile market and assist the struggling operators to make profit. The telecom regulator, however, needs to watch the proposed development (merger) closely so that the proposed merger does not, in any way substantially lessen competition and hurt mobile users' interest. If necessary, BTRC will have to put some restrictions/conditions in approving the proposed merger, if it proceeds at all.
It is to be noted here that in 2008, the telecommunications regulator had requested the operators to share their infrastructure resources among themselves. Warid and Citycell have already signed a deal on infrastructure sharing. The sharing of infrastructure helps reduce infrastructure duplication and related costs. The recent regulatory reforms (such as price cap, directions to share infrastructure, transparency in licensing process) have been largely successful in making the market more competitive. The market concentration of the mobile phone industry has reduced in the last two or three years following the launching of mobile phone service by Teletalk Bangladesh Ltd and Banglalink. The mobile phone sector is an industry where network externalities and switching costs are important. Delaying new entry (sequential entry strategy) creates first-mover advantages for incumbents. Late entrants face some difficulties compared to incumbents such as they usually need some time to build up a reliable country-wide network creating temporary quality differences at the time the late entrants entered the market. In the beginning of their service launching, consumers, therefore, will naturally prefer one of the incumbent operators that already have established optimal network coverage and a brand image. A second reason may be that for entrants, it needs some time to build up a "local" reputation in a country even if they have a parent in another country (Bijwaard, Janssen & Maasland, 2008).
Bangladesh waited more than four years before issuing the second mobile phone licence that helped the first mobile operator to monopolise. Bangladesh took another seven to eight years in issuing two more licences (Teletalk and Warid Telecom) thus creating significant disadvantages (as mentioned earlier) for the late entrants to compete with the incumbents in a level playing field. The big advantage of simultaneous over sequential entry is that competition is initiated on a level playing field, before network externalities and switching costs take hold. This implies that if the government wants to create a level-playing field between operators, the decision when to award new licences is indeed a very important consideration. The Bangladesh experience suggests that opening a service sector without having a regulator provides no or minimum benefits of liberalisation to the users. Even establishing a sector specific regulator is not enough to have a competitive market unless the regulator is effective, vigilant and supportive to having a competitive market.
The authors are with the
Department of Management,
Monash University, Australia:
e-mail: ma_yusuf@hotmail.com
DESPITE the presence of multiple operators, the mobile phone users were deprived of lower tariffs, a natural outcome of competitive market until 2003-04. The industry structure and the resultant cooperative behaviour (instead of competition) among operators combined with poor regulatory role are often considered responsible for sub-optimal competitive outcome. Before Teletalk and Banglalink's launching of mobile phone service, GrameenPhone (GP) was the dominant firm. GP is still the dominant operator although it lost its market in the last two to three years to its rival operators.
It is widely known that the telecommunications regulator was mostly ineffective until 2006. Weak regulatory regime seems to be largely responsible for the sub-optimal competitive outcome (i.e. high tariffs and poor quality of service) To identify if industry structure has played any role in denying liberalisation benefits (lower tariff and better service) to mobile phone users, an examination of the market concentration of the industry is necessary. One of the most used methods in determining industry structure (i.e. concentrated market or non-concentrated market) is the Herfindahl-Hirschman Index (HHI). HHI can be measured using the market share of the operators in the industry. Using the market share of different operators for 2004 (63%, 25%, 2% and 10% for GP, AKTEL, Sheba and Citycell), Herfindahl Hirschman Index for mobile phone industry of Bangladesh was found to be 4698.
HHI is a commonly accepted measure of market concentration and extensively used by the US Department of Justice (DOJ) in assessing the impact of merger and acquisition on the competitiveness of a particular sector. Market concentration is also important to assess the intensity of competition in a particular industry. As per this measure, a market is considered a concentrated one when HHI is above 1800. A market is un-concentrated when HHI is less than 1000. As HHI of Bangladesh Mobile Phone industry is much higher than 1800, the industry is a highly concentrated one. However, it is not unusual for network industries. Mobile phone markets are mostly concentrated, involving two, three or five operators only. The matter of concern is that the Bangladesh market is more concentrated than many other countries as measured by HHI index and the impact it had on the competitive outcome of the industry. HHI of Bangladesh, Singapore, Australia, UK and HK are 4698, 3736, 3487, 2504 and 1936 respectively.
Market concentration is a critical determinant of competitive behaviour. Concentration facilitates coordination (and even collusion) instead of competition among the firms in the industry. In other words, concentration reduces overall rivalry. It seems that the high level of concentration in the mobile phone industry has dampened competition in the sector. The concentrated mobile phone market resulted in coordination and collusive behaviour among mobile providers. The mobile phone subscribers had to pay high call charge because of tacit collusive arrangement among the four private mobile operators (Kibria, 2005). Stable and similar tariff structures of the operators are suggestive of tacit collusion.
Moreover, the dominant operator did not share the benefits of economies of scale it had gained from concentrated share (market share) holding. The adverse consequences of concentrated market due to the possibility of abuse of a dominant position by the market leader (which was the case in Bangladesh before the arrival of Banglalink) were not seen to be the major concerns of the telecom regulator. It seems, mobile telecom operators were absolutely unconstrained (until 2003/04) in making their business practices in Bangladesh no matter how the business practices look like -- fair or not fair.
In order to remove the adverse consequences of the concentrated market, policy makers may consider some policy measures to promote effective competition in the sector. Adoption of 'Asymmetric Regulation' could be such policy measures in this regard. This type of regulation provides greater advantages to new entrants and places more stringent regulations on dominant firms. As part of such measures, the interconnection fee that the new entrants pay to the incumbent can be fixed close to the cost of termination on the incumbent's network, providing the advantage of economies of scale (Kim and Yoon, 2004).In contrast, the incumbent's equivalent fee to the entrants' network can be arranged to represent the higher cost of termination on the entrants' networks. Such regulations are found in practice. In Korea, a retail price regulation has been imposed on SK Telecom to ensure cost-oriented access charges on termination (for interconnection) with a view to benefiting new entrants.
Another strategy could be to exercise price control over the incumbent dominant firm by not allowing it to cut prices below the regulated level in response to the entry of new firms. With a view to applying the strategy, BTRC -- the regulator in the telecom sector -- could specify explicitly the definition of dominant firm (such as quantitative thresholds in terms of market share) in various markets and assess whether any incumbent firms hold and abuse market power. The Telecommunications Authority of Hong Kong has explicitly set out the meaning of dominant firm and adopted the policy of price control on the dominant firm in order to help new firms gain market share quickly (Chen and Lyn, 2002). Placing obligations on the dominant firm to share its telecommunication infrastructure such as Base Transceiver Stations (BTS), towers, space, poles and co-location on principle of non-discrimination and cost-orientation with other operators may be a good policy direction to foster competition and reduce entry barrier for new entrants.
The consolidation of the sector through merger and acquisition may help reduce the market concentration and dominance of a single firm. This is because the proposed merger of Banglalink and AKTEL is expected to create a giant mobile firm, capable of challenging the dominant GP (The Financial Express, 21 May, 2009). This would definitely help change the competitive landscape of the mobile market and assist the struggling operators to make profit. The telecom regulator, however, needs to watch the proposed development (merger) closely so that the proposed merger does not, in any way substantially lessen competition and hurt mobile users' interest. If necessary, BTRC will have to put some restrictions/conditions in approving the proposed merger, if it proceeds at all.
It is to be noted here that in 2008, the telecommunications regulator had requested the operators to share their infrastructure resources among themselves. Warid and Citycell have already signed a deal on infrastructure sharing. The sharing of infrastructure helps reduce infrastructure duplication and related costs. The recent regulatory reforms (such as price cap, directions to share infrastructure, transparency in licensing process) have been largely successful in making the market more competitive. The market concentration of the mobile phone industry has reduced in the last two or three years following the launching of mobile phone service by Teletalk Bangladesh Ltd and Banglalink. The mobile phone sector is an industry where network externalities and switching costs are important. Delaying new entry (sequential entry strategy) creates first-mover advantages for incumbents. Late entrants face some difficulties compared to incumbents such as they usually need some time to build up a reliable country-wide network creating temporary quality differences at the time the late entrants entered the market. In the beginning of their service launching, consumers, therefore, will naturally prefer one of the incumbent operators that already have established optimal network coverage and a brand image. A second reason may be that for entrants, it needs some time to build up a "local" reputation in a country even if they have a parent in another country (Bijwaard, Janssen & Maasland, 2008).
Bangladesh waited more than four years before issuing the second mobile phone licence that helped the first mobile operator to monopolise. Bangladesh took another seven to eight years in issuing two more licences (Teletalk and Warid Telecom) thus creating significant disadvantages (as mentioned earlier) for the late entrants to compete with the incumbents in a level playing field. The big advantage of simultaneous over sequential entry is that competition is initiated on a level playing field, before network externalities and switching costs take hold. This implies that if the government wants to create a level-playing field between operators, the decision when to award new licences is indeed a very important consideration. The Bangladesh experience suggests that opening a service sector without having a regulator provides no or minimum benefits of liberalisation to the users. Even establishing a sector specific regulator is not enough to have a competitive market unless the regulator is effective, vigilant and supportive to having a competitive market.
The authors are with the
Department of Management,
Monash University, Australia:
e-mail: ma_yusuf@hotmail.com