Introduction
Broadband systems play a huge role in a country’s economic and social growth. A study from Harvard economist Barro(2012) highlighted that construction of broadband networks contributes to GDP growth, productivity, firm efficiency and employment. According to the UK broadband impact study report, efficient broadband systems will add to about £17 Billion to the economy by 2024.Hence it is certain that the introduction of broadband connectivity will prove to be beneficial to introduce broadband system in a developed country which is similar to UK.The purpose of this report is to help to introduce broadband system in a country by analyzing using economic concepts and imply it in the real world.
Economic Concepts
During the introductory phase the market structure is monopoly as it is a single supplier. Monopolist with no rivals make it the price maker that dominates the whole industry. In monopolistic competition, there is no supply curve since monopolist focus on seeking profit maximizing price rather than price taker. The network provider faces a downward sloping demand curve where the price falls as monopolies output increases in order to sell more. According to graph 1, the profit is maximized when marginal cost is equal to marginal revenue (MC=MR) Moreover, monopolist with great monopoly power would make super-normal profits by charging a higher price than competitive market in order to maximize profits. Moreover, average cost is higher than normal due to less competition in market, resulting in diseconomies of scale. Monopolist seem to be allocative inefficient since price exceeds marginal cost. Besides, customers have to accept the price as there aren’t choices in monopolistic competition, even if the firms raise price.
The Case
In the telecoms sector, the barrier to entry is very high due to high fixed cost of infrastructure. Though broadband suppliers are privately owned, the broadband market is highly regulated by government where there is a strict regulation regarding the entry and exit of market. Market structure is likely to evolve and adapt as new broadband systems are introduced to the country. In a country that is similar to the UK in other respects, must most definitely have a broadband system installed. Studies show that spending on UK infrastructure is correlated with increased productivity of the UK economy. There is evidence to suggest a strong link between faster broadband speeds and productivity. A study from U.S suggested that cities with faster internet speeds currently report a 1.1% higher per-capita GDP (Fung, 2014). In 2006, the UK telecom market was dominated by six companies, with the top two taking 51%, these being Virgin Media with a 28% share, and BT at 23%. BT became leader in 2011.British Telecom lost its protected monopoly status when it was privatized in 1984. Privatization has encouraged new entrants as well as competition in the market. The UK telecoms market is regulated by OfCom,which ensures that the people and their interests are protected while also ensuring that competition thrives. Following the current example, in a country while launching a Broadband provider, even if the market at first is monopolistic and then turns into an oligopolistic one , healthy competition in an economy can thrive when there is a regulatory board that watches over the market to ensure a healthy economic environment. Market structure will change to oligopoly competition dominated by a few large firms once broadband provider open up existing resource to rivals, whereas barrier to entry remains high. The most important feature is their interdependence as every action of firms will affect market. Oligopolies consider both market actions and possible rivals reactions before adopting strategy as game theory. Bertrand model focus on price competition where customers always choose the cheapest since products are perfect substitutes thus, firms will reduce price in order to gain market share (p1=p2=MC). However, Cournot model was compete by quality in which each firm chooses how much quantity they will produce rather than competing price, both of firms take best responses to get Nash Cournot Equilibrium. Deadweight losses can be dealt by government subsidies such as increased competition to achieve allocative efficiency. Regulators try to encourage new entrants to enter where competitors can use existing cable and network avoiding wasteful duplication.
Problems
The de-regulation of the telecoms market, which was then followed privatization of the sector, opened up the market to rival suppliers, and with the application of new technology, the barriers to entry of market were dramatically reduced. Over the past few years there has been drastic changes in the communications industry with alternatives such as Whatsapp and WeChat challenging the current business models and functions, it was a period of exceptional change. According to reports there is change currently required in the structure as BT has been under wide criticism from its rivals such as Sky,Vodafone and TalkTalk over the ownership of “Open Reach Network” and arguing broadband may be run better as a separate entity and are demanding a “Structural Separation”. Rival companies have to depend on the “openreach” network to provide their own services. Service providers using BT Openreach’s infrastructure for broadband packages include BT, Sky, Talktalk and Vodafone. Many of these service providers have lodged complaints to Ofcom as they have a reduced opportunity to compete in the most effective manner. The complaints include evidence of poor quality customer service, problems arising from a conflict of interest between BT and BT Openreach and concerns relating to the future investment in UK broadband infrastructure. Even though the current “conscious uncoupling” of openreach will have no implications immediately, in the long run it will improve competition and investment in Britain’s Broadband infrastructure regulatory board will also set out whole sale price capping for superfast broadband. During the introductory phase of Broadband in a country like that of the UK it is vital to understand and be prepared for new entrants as it’s a developed market with tremendous potential and the only way to survive is to innovate and the launching company must ensure that the employees are incentivized in the right manner to do so.
Solution
Regulators can set price controls and formulae, often called price capping. This means forcing the monopolist to charge a price, often below profit maximizing price. For example, in the UK the RPI – ‘X’ formula has been widely used to regulate the prices of the privatized utilities. In the formula, the RPI (Retail Price Index) represents the current inflation rate and ‘X’ is a figure which is set at the expected efficiency gain, which the regulator believes would have existed in a competitive market. However, there is a dilemma with price controls because price-capping results in lower prices, but lower prices also deter entry into the market. Regulators may remove price caps if they judge that competition in the market has increased sufficiently.They must also try looking at increasing the competition so that when there is a lot of healthy competition companies are motivated to innovate inorder to meet the challenges ahead in the mst efficient manner. In relation to complaints with poor customer service in the UK, the way the uk regulatory board has responded is by ensuring that there is automatic compensation for the customers who suffer from “poor” service and would receive their money back without even having to ask. Hence one of the problems here is that it’s a known fact that regulation isn’t very good for innovation and regulation often forces employees of an organization to work against their own financial interests, in a large company like BT,a majority of their shares are owned by the employees itself and incentivizing them by increasing profitability and shareholder value.Hence its important to not just regulate but also ensure the right process which would enable growth for the economy as a whole.