(2021) A Level H2 Econs Paper 2 Essay Q3

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3. Singapore’s telecommunications (telco) market is dominated by four firms - SingTel (32%), StarHub (25%), M1 (22%) and new entrant MyRepublic (15%). Commentators argue that Singapor'e’s telco market might be considered an oligopoly.

(a) Explain why Singapore’s telco market might be considered to be an oligopoly and how economic theory suggests this market structure would affect the firms’ pricing and output decisions. [10]

Explain why Singapore’s telco market might be considered to be an oligopoly 

 Oligopoly characteristics 

• An oligopoly is characterised by a few large firms dominating the industry, high barriers to entry & mutual interdependence 

Dominated by a few large firms 

• The four firm concentration ratio for the 4 largest firms - Singtel, Starhub, M1 and MyRepublic take up 94% of the total market share. 

• This shows that the telco market in Singapore is dominated by a few large firms. 

High barriers to entry 

• Telcos possess high barriers to entry due to the following reasons 

  1. Existing brand loyalty, especially with customer loyalty programmes (e.g. HubClub), two year contracts 

  2. Legal barriers - Telcos can only operate with a licence granted by the government 

  3. Expensive equipment & infrastructure costs - need to invest in expensive telco equipment e.g. base stations to provide signal coverage 

Mutual interdependence 

• Telcos in Singapore frequently react to rivals’ change in prices for mobile plans and also product offerings. 

Higher prices, lower output compared to MC 

An oligopoly firm operates in a market where there are only a few large firms - this is compared with an MC firm which operates in a market with many small firms. Thus, demand for goods produced by an oligopolistic firm would likely be more price inelastic than an MC firm. 

 To maximise profits, firms will choose to produce at the profit maximisation output based on MC = MR.  

 As illustrated in Figure 1 below, the ARo & MRo represents that of an oligopolistic firm vs ARmc & MRmc which represents that of an MC firm. 

 The oligopoly firm will produce at a higher price Po and lower output Qo as compared to the MC firm which will produce at lower price Pmc and higher output Qmc 

Price rigidity 

Prices will also tend to be rigid due to the mutual interdependence that exists between oligopolistic firms. 

 Referring to Figure 2, the mutual interdependence can be explain as such: 

This is because if any firm in an oligopoly were to increase their price, no firm will follow suit, demand for the firm’s good will now become very price elastic → an increase in price thus leads to a more than proportionate fall in quantity demanded → total revenue will fall 

 Conversely, if a firm in an oligopoly decreases its prices - all other firms will follow suit, demand for the firm remains price inelastic → thus a decrease in price thus leads to a less than proportionate increase in quantity demanded → total revenue will fall 

Since it is not beneficial for firms to increase price to above Pe or decrease price to below Pe,  firms will prefer staying put at Pe. 

(b) Discuss how government intervention in Singapore’s telco market could protect consumers, and consider the extent to which such intervention will be successful. [15]

Legislation / Regulatory requirements 

Government intervention can come in the form of regulatory requirements ensuring minimum quality / service standards. For example, the government can require telcos to ensure that there is no significant / prolonged downtime for mobile / broadband services. This is to prevent complacency by firms to deliver minimum standards due to lack of significant competition. 

Fines can be imposed on telco firms failing to meet such requirements. 

For example - a fine of $447,000 was collectively imposed on Starhub & M1 for service disruptions to broadband services during the circuitbreaker period in 2020. 

 Ev: Manpower needs to be allocated to set up a regulatory body to ensure that telcos comply with the requirements & investigate when they fail to do so - such enforcement costs can be costly. 

While such fines can somewhat deter firms from being complacent - firms may also consider these fines to be insignificant compared to hefty maintenance costs or cost related to quality control. 

Granting of more licences / Increase competition 

In most countries, telco firms are industries that are heavily regulated. Only a limited number of licences are granted to telco firms - raising the barriers to entry. 

One way to increase the level of competition in the industry is to increase the number of licences granted to firms. 

As more firms enter the industry, this pushes prices downwards and forces existing firms to become more competitive. 

 Ev: Virgin Mobile entered Singapore’s market in 2001 in such an arrangement, but folded barely one year in operations due to lack of profitability / inability to gain substantial market share. This could suggest that Singapore’s market can be too small to sustain a larger number of players in the market. 

Nationalisation 

One possible consideration to protect consumers would be for the state to take over existing telco firms and directly provide consumers with the services. 

The state-owned / state-run telco firm(s) can then choose to charge specific prices (say, at where P=MC) to ensure that allocative efficiency is met, and consumers’ interests are also protected. 

 Ev: There is a high likelihood that state-own/state-run firms charging nominal low prices will be making sub-normal profits and thus requiring funding through taxpayers’ money. It is worthwhile considering whether it would be a good use of government funding compared to other potential uses. 

Conclusion 

Intervention may not always lead to a better outcome for consumers. In a small market like Singapore, the current number of players may already be sufficiently competitive. For instance, Singapore boasts one of the highest home broadband speeds in the world but yet prices are amongst the lowest within the developed world. This is an indication that perhaps, significant intervention may not be required to keep telco firms competitive in Singapore. 

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