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Limited Availability of Frequency Spectrum as a Barrier to Entry

They were in the bank, toting guns, as lots of money happened to go from the vault. That was the essence of last week’s claim by Mario Monti, the European Union’s competition commissioner, that mobile phone operators have gouged customers by colluding to raise rates for roaming – ie, when you use your mobile phone abroad. Mr Monti’s case is circumstantial, but he says the network operators will have to answer it

In December Mr Monti’s office issued a report on the market for roaming. Most countries in the European Economic Area (EEA), the report found, have a roaming market that is ripe for collusion. The product is undifferentiated, and the number of sellers small. Pricing in the wholesale market is transparent, making it easy for a market leader to raise prices, and for other operators to take the hint and follow suit. The costs of running mobile networks do not vary that much. As a result, says the report, sellers’ pricing structures tend to run in parallel, at ‘high and rigid’ levels. Mr Monti cites ‘an almost complete absence of competition’, and says that ‘prices appear to be converging’, towards e1 (89 cents) a minute.

To be fair, the conditions for collusion, apart from the small number of sellers cited above, could also be present in a perfectly competitive market. And retail prices in Europe are not quite as similar as Mr Monti’s comments suggest. For a call from Belgium to Britain today, using a British mobile phone, rates range from 51p (73 cents) to 99p a minute. Rates for receiving calls also vary widely. On One2One, a monthly charge of only £2.50 can lower the receiving rate from 76p to 16p. That is an indication of just how low the marginal cost of roaming calls might be.

Looking closely at wholesale rates, the commission found that the cheapest in Europe were about e0.46 a minute. In Belgium, Britain, the Netherlands and Norway, some operators had rates at least twice as high as the average of the five cheapest. Yet even the lowest wholesale rates in Europe may be gouging consumers. Just look at what is on offer in North America. MicroCellnet, a Canadian operator that has 1m customers, recently launched a flat-rate American roaming service: for customers on a standard monthly service agreement, the retail price of calls made anywhere to Canada or within the United States is 20 cents a minute – less than half even the lowest wholesale rates in Europe.

Perhaps Europe’s costs are so different from North America’s that they justify BT Cellnet’s roaming rate of 99p a minute? It seems unlikely. Chris Doyle, an economist at Charles River

Associates, points out that roaming generates up to 35% of European operators’ revenues, although it accounts for a much smaller share of the time customers spend on the telephone. Asked exactly what costs and market forces determine its roaming rates, BT Cellnet says the question is ‘too commercially sensitive to answer’.

Market concentration also points to a lack of competition. In each of 11 EEA countries, a single operator had a market share of at least 50%. Still, the biggest obstacle to a competitive market for roaming may be the ease with which the operators can exploit consumers. They have little incentive to compete over roaming rates – to quit the cartel, Mr Monti might say – since mobile users do not usually use rates abroad as a basis for choosing a provider. Few customers know how much they are paying for roaming. Even fewer actively choose which local network to roam on.

The commission’s report recommends making choice easier for consumers. In the best of worlds, roamers would be able to get rate information piped through to their telephones from various providers, before choosing which service to use. Mr Doyle believes that call-back services, which allow roamers to replace higher calling fees with lower receiving fees, will put pressure on operators to cut rates. If the commission wants to see rates fall swiftly, however, it will have to take action itself.

  1. What is the nature of the barriers to entry in the market?
  1. Why is it easy for the operators to exploit consumers in this case?
  1. If the commission does not take action, do you think it is likely that rates will fall much in the future?

The main civil use of uranium is to fuel nuclear power plants. Nuclear power plants provide electricity at a high fixed cost, but very low marginal cost. By contrast, plants fuelled by natural gas have relatively lower fixed costs, but higher marginal costs. In the late 1990s, although Western consumption exceeded production by 30,000 metric tons per year, the price of uranium fell owing to estimated Russian stockpiles of 545,000 tons.

  1. Why is the short-run demand for uranium relatively inelastic?
  2. What does the long gestation period of nuclear power plants imply for the difference in time between the short and long runs in the demand for uranium?

Information constraints are one of the main factors that keep markets separate. Overseas Chinese commerce has been portrayed as ``borderless''. The personal connections of many overseas Chinese business people have allowed otherwise disparate markets to be united. Those people function as middlemen facilitating trades and taking commissions in return.

Recent advances in the Internet and e-commerce, however, have posed significant challenges to the overseas Chinese networks. By providing the technological means for truly ``borderless" trade, the Internet and e-commerce have slashed down the commissions for the middlemen.

  1. Middleman commissions can be viewed as government taxes on producers or consumers. Illustrate how the presence of middlemen affects the operation of competitive markets.
  2. Examine the effect of decreasing middleman commissions on the buyer and seller surpluses.

Elevators generally break down at random times and for different reasons. Elevator maintenance contractors must have trained service personnel to provide routine and emergency service. Shan On Elevator has 200 service personnel to maintain 1,000 elevators.

  1. Suppose that Shan On has received a contract to maintain an additional 1,000 elevators.Do you expect that Shan On will need to double service personnel? Why or why not?
  2. Does the example in (a) illustrate economies of scale or scope?
  3. Escalators and elevators use quite different technology and parts. But many clients operate both escalators and elevators. Are there any economies of scope for a contractor to maintain both escalators and elevators?

Limited Availability of Frequency Spectrum as a Barrier to Entry

According to Premkumar and Rajan, (2012), the prices of services become efficient in the case of low entry barriers in the market. In any business this is the unset rule that in the absence of healthy competition the market leader suppose to add higher prices for its products and services. The mobile network companies are also not exception for this concept. In most of the EEA countries, it is determined that 50% of market share is acquired by only one company. This clearly indicates the lack of competition and the competitors who want to compete would not able to get marginal cost benefit which they can provide to customers. In such imbalance and dominant market, it is difficult to have entry barriers. The new entrant is difficult to come in the mobile operating network market through which pricing policies can be disciplined.

Bengtsson, et al, (2011) specified two reasons which shows that entry of new company in mobile network market is not easy; 1) frequency spectrum availability is limited 2) possibility of switching of customer in case of poor service or due to other reasons, for example, customer can switch their network in case of finding cheaper and more prominent network.  

Access to the spectrum is integral part to operate mobile telephone network and incase of its limited available it become difficult to enter into this market (Porter and Heppelmann, 2014). The required access to frequency spectrum and its rights are provided by the country’s Government and have the jurisdiction for it. Hence, the mobile networks are limited in amount and Government issues limited amount of license due to the state of technology. This is the questionable because it is identified that the number of mobile phone network does not guarantee the fair competition in the market. This increase the dominance of only one company in the market, reduce the competition chances and increases the chances of customer exploitation through excessive call and roaming charges.

According to Bohari, et al., (2017), the main behavior or characteristics of customer are they can switch to other options or company in the market for the sake of monetary and service benefit. Price advantage provided by one company is the main reason behind the customer switching. If customer gets the similar benefit in fewer prices by one mobile operator then there is highest probability of switching from one network to another network. Number of options is available to the customer through which they can change the mobile network. They can port their number in most favorable and cheap pricing network. This is good for creating healthy competition in the market but at the same time it creates barriers for entry. Presence of mobile number portability (MNP) option can decrease the costs of switching which may create chances for new entry in the market (Dabhilkar 2011). If new entrants are providing the best services at the low price then they are likely to get positive reply from the customers. This will also help to generate the competition in dominating mobile phone network market.

Switching Costs as a Barrier to Entry

Healthy competition in the business is essential and required to establish fair trading.  In the absence on competition in the market, the companies will start acquiring the little unfair pricing on their products and services. If those services are essential for customers then they have to buy the services at the company’s price. Here the customer exploitation starts because they have no or few choices of switching the service. This case is also the best example of exploiting customer in the absence of healthy competition in market of mobile operator services. The customer have to pay the unfair charges applied on the roaming and other call rates which is happening due to lack of competition. Once customer would have good option for switching services they would chose another service (Furubotn 2011).

In the report on roaming market issued by Mr. Monti’s office which derived data about roaming services and chares in most countries of European Economic Area. The result of report proposes the requirement of ripe for collusion in roaming market. The product provided by company is not differentiated and sellers are also small in amount. Pricing strategies followed in the mobile operator market is fair which enhances the possibility for market leader to raise prices which would be followed by other mobile operator by default (Gans 2013). Though the costs of mobile network business is invariable and does not have healthy competition in mobile operating market the pricing structure followed by the company is high and constant.

In the case, Mr. Monti, commissioner of the European Union’s competition published survey report and depicts the lack of competition in the mobile networks market. This directly implies the rise in the prices and would become rigid in the absence on other strong option of services for customer. Customer influence or buyer power is very low in this case because they have less option to switch their interest or services. This is another reason why it is easy for mobile network companies to exploit customers, and acquire e1 (89 cents) charge/ minute.

The possibility of entry of new company is also low because of the costs, network, and technology required to establish this business. In the competitive market conditions of collusion also present despite of having small number of sellers in the market. The retail price of the mobile phone network, call charge and roaming charge are not similar as suggested by the EEA commissioner, i.e. 89cents. To call from Belgium to Britain user have to pay rates from 51p to 99p per minute.  This is applicable when user calling through Britain’s phone, similarly the call rate for incoming calls in roaming also has lot of variation. If users pay £2.50 which is a monthly charge for roaming in One2One then the charges acquired reduced from 76p to 16p. This shows how low the marginal cost of roaming might be but the mobile network companies are just exploiting customers by acquiring heavy call rates.

Market concentration also clearly indicates the lack of competition in the market. It is determined in the EEA commissioners report that in more than 10 EEA countries, a single mobile network operator company had near about 50% of share in the market (Hardin 2011). The company exploiting customers in roaming market is the biggest competitive obstacle in the market. The competitor trying to give fight to large operators has little incentive on roaming rates so that they are unable to compete strongly.

The Impact on Roaming Services

 The price of the product and services are firstly depend on the quality, and then on the competition in the market. In less competitive market there are high chances of increasing costs of the services. This is happening in the mobile phone operating network (Harding and Lovenheim, 2017). The companies are acquiring greater charges for roaming and other call rates; data pack rates of the companies are also high.

This increases the customer exploitation by the company. The EEA commissioner report also indicates the excessive call rate acquired by the 11 EEA countries. To call from Belgium to Britain through Britain’s phone, customers have to pay the charges from 51p to 96p. If customer activates monthly pack for roaming, which is an One2One mobile charge for £2.50 then they will get benefit on the call rate which clearly indicate that mobile network companies have low marginal costs for roaming.

In the current case, in order to stop the customer exploitation performed by mobile network companies and reduces the call and roaming charges the EEA commissioner has adopted certain strategies. It is recommended in the Mr. Monti’s report that they want to make choice easier for customer and need to increase the competition in market to increase the fair pricing rate. In the best of worlds, customer who is travelling in roaming region would be able to get the information about all networks rate into their telephones by different providers. This strategy enables the customer to choose the best offer and best service from the suggested rates and offers from various providers.

With the decision of commissioner customer can also get call back services through which customer can adjust the highest calling fees in roaming with lower receiving fees. This strategy will help to put extra pressure on the mobile network operating companies in order to reduce their call rate. If commissioner does not apply this strategy it would not easy to drop call rates. Hence this strategy adopted by the commissioner is definitely beneficial and competitive.

The short-run demand for uranium is inelastic

The demand of uranium tends to be inelastic in short run due to gestation project which is time between start of the project and actual production of power. The demand is inelastic because when prices change buyer need more time to respond and change their production requirement, as shown in figure1. Another reason due to which demand and supply of uranium can be inelastic in short run, as buyer need time to notice and respond the changes in fixed and variable costs (Coglianese, et al., 2017). For instance, when fuel prices take boost, the market can notice slight reduction in demand in first few months. Hence, in short run the demand of fuel become very inelastic. This concept is somewhat true for the uranium because during the long gestation period the uranium prices experience rise due to which the demand of uranium become relatively inelastic. Here shows the diagram of elasticity of demand:

Uranium supply from the enrichment of tails has negative impact on the prices for particular time period. The main reason behind the negative relation of enrichment of tails on price is drop in tails assays. When the prices of uranium increases as compare to the price of enrichment then tails assays drop, and hence, the amount of uranium also reduced which is recovered from the tails enrichment (Cochran 2014). This situation is obviously a counteracted situation and tends to the extent where the demand of uranium become inelastic and experience sudden fall. When utilities buy fuel for supply in short run, the relatively low competition exists because few plans have the capacity to switch from one fuel to another. It is considered that uranium is somewhat immune for short run competition because operating costs of uranium is relative low.

The gestation period of nuclear power plant is the time needed between the start of the project and the production of power.  Eight to twelve years are the estimated lead time required for uranium exploration and mine development. So the short and long run demand of uranium depends on the gestation period. This is because, if firm would start selling the uranium after accomplishing its production capacity then the lengthy gestation period can become an entry barrier for the firm.  In particular, if small group uranium production companies were possibly raises the prices of product above marginal cost of production and new entry in the field build competitive pressure to bear after ten year of exploration and development, then there are chances of developing short run monopoly abuse (Sidak and Spulber 2013). However, this possibility is reduced due the long run nature of exchange in this field of uranium production.

Uranium is marketed in two ways first is short run, i.e. spot market and second is long run, i.e. future market. In the long run market, contracting for uranium need near about 75% of total sales and this percentage has been enhancing because of growth in the commercial uranium market. Over dependence on the long run contracts become pro-competitive due to the flexible system of exchange between buyer and seller. Producer should reserve producible for instant delivery to achieve competitive advantage in sport market, it should not acquire current production limit to secure future long run delivery contract.

Presence of middlemen affects the operation of competitive markets:

International trading always helps to maintain competitiveness in market and offer variety of products and services to the consumers. International business also has greater impact on the economy of country. Government plays important role in international trading, because entry of the company in a country is totally depend on the decision of government. The taxes applied on the producers and consumers are known as middleman commission and it plays important role in the market. Middleman presence ensures the seamless flow of products and services with the help of balancing supply and demands and hence, both producers and consumers benefited due to the presence of middleman. In the competitive market it is essential to have middleman to ensure the right price for the particular product and service. On the other hand, middleman can also have greater influence on the manufacturers as they can inform about the actual situation of the market (Scherer 2011). Consumers can also gain advantages through the services offered by the middleman in terms of promotions and delivery. 

Above discussion illustrate the positive side of having middleman commissions in competitive markets. There is downside of having middleman commission in international trading. First and most important impact of middleman commission is on the price of the products. The manufacturing and other operations and its prices have been decided according to the taxes paid to the government. Hence, price inflation is one of the impacts of middleman commission in competitive market place. Increase in the prices is based on expenditure on various operations like warehousing, insurance and transportation. The middleman obvious wants to make profit in account of services they provide and hence, they incorporate some profit markup in the sales of products and services. Consumers hence have to pay the prices of having middlemen in the supply chain. 

Electronic commerce has become integral part of today’s business and it has changed many business equations. For instance, the role of middleman and their commissions have been reduced and manufacturers can direct contact and trade with the consumers. As a result the price of products and services also reduced and consumers can get the products at low price. It has positive effect on the surpluses of the buyer as well as seller. Price of products and services is supposed to reduce due to the emergence of e-commerce and this is because elimination of brokers and distributors from the supply chain (Valletti 2014). E-commerce has automated the exchange of information between the seller and buyer and it saves the time, efforts and expenditure of both the parties. Manufactures need to expend less on the inventories and transportation which automatically reduce the product price. Similarly consumers can buy the product at the wholesale price directly on the company rate.

E-commerce has been playing vital role in the digitization of products and services and the distribution channel. Emergence of online business has reduced the need of assembling the bulk of data and packaging as it needed before because products are delivered as per the demand and order of the product (Valletti 2011). They are booked on the internet and delivered in the estimated time period. The forms of developing and delivering products have been changed, and it also transformed the way of packing and look of the goods. For instance, news is offered without printing newspapers or music is available through different mediums other than CDs.

Whether to double the service personnel, in case of adding double amount of elevator?

It is crucial part to maintain and manage the functioning of elevator and hence, the contractor needs qualified, skilled and experienced personnel to do the maintenance work.  The states have provision to appoint licensed personnel to do the work (Williamson and  Mumssen 2015). There is a provision for the personnel those are employed by the contractor for doing the maintenance and adjustment of the elevator. The personnel also have to show the valid licensing proof of maintenance work. Here, in this case the Shan On contractors has appointed 200 personnel for maintaining 1000 elevators and due to the above discussed reasons they need not to double the service personnel for maintaining addition 1,000 additional elevators. All the personnel are well experienced and licensed and they can manage the extra maintenance.

In the above example (a) Shan on contractor supposed to get order of maintaining 1000 addition elevator. It is currently maintaining 1,000 elevators with the help of 200 trained service personnel. Economies of scale for a company incorporate decrease in the average cost per unit at the time of increasing the scale of production for a single product type. On the other hand, economies of scope incorporate decreasing the average cost by producing more types of goods.

This is the example of economies of scale where the number of product for maintenance is increasing while the personnel for handling them are constant (Wheelock and Wilson, 2017). Here product type is same but scale of production is increased but the average cost of maintenance is same because in example 2000 elevator number of service personnel are 200.

Economies of scope are defined as to lower the average cost by producing more types of products. Here, contractors operate two types of products, elevators and escalators at the same time. Product diversification is maintained efficiently in the economies of scope. The product diversification is supposed to be efficient only when products are based on the similar and recurrent use of proprietary know-how. Number of product maintained is increased with the help of same people per elevator and escalator, the amount spend on maintenance of two different products (escalators and elevator) can be reduced.

The trained and skilled and licensed personal required to maintain the elevator and escalator. This policy or regulation helps to ensure the experience of personnel for working on the equipment. New personnel need to submit the copies of technician’s licenses.

 There are different aspects when economies of scope arise, firstly when firm share centralized function like marketing product or financing the same. Secondly, when business forms the interrelationships of the products within business process, for example, selling of one product along with another one. In this case, client operates escalator as well as elevator at the same time and hence, it is the example of economies of scope.

References

Premkumar, G. and Rajan, J. (2017) Customer Retention in Mobile Telecom Service Market in India: Opportunities and Challenges. Ushus-Journal of Business Management, 12(2), pp.17-29. Bengtsson, L., von Haartman, R., Dabhilkar (2011) Low-cost versus innovation: Contrasting outsourcing and integration strategies in manufacturing, Creativity and Innovation Management 18 (1), pp.35-47.

Benningson, L. (2016) Changing manufacturing strategy. Production and Operations Management 5 (1), pp.91-102.

Cochran, T. B.  (2014) The Liquid Metal Fast Breeder Reactor, An Environmental and Economic Critique, 84. pp.2

Bohari, A. M., Hin, C. W. and Fuad, N. (2017) The competitiveness of halal food industry in Malaysia: A SWOT-ICT analysis, Geografia-Malaysian Journal of Society and Space, 9(1).

Furubotn, E.G. (2011) Economic Efficiency in a World of Frictions, European Journal of Law

and Economics 8, pp.179-197.

Gans, J.S. (2013) Network Competition and Consumer Churn, Information Economics and

Policy 12, pp.97-109.

Hardin, G (2011) "Outlook for Nuclear Fuels," Quarterly of the Colorado School of Mines, 78(2), pp 172.

Harding, M. and Lovenheim, M. (2017) The effect of prices on nutrition: comparing the impact of product-and nutrient-specific taxes. Journal of Health Economics, 53, pp.53-71. 

Coglianese, J., Davis, L. W., Kilian, L. and Stock, J. H. (2017) Anticipation, tax avoidance, and the price elasticity of gasoline demand. Journal of Applied Econometrics, 32(1), pp.1-15.

Sidak, J.G. and  Spulber (2013) Deregulatory Takings and the Regulatory Contract. UK:

Cambridge University Press.

Scherer, (2011) Industrial Market Structure and Economic Performance, Chicago: Rand McNally, pp. 73

Valletti, T.M  (2014) A Model of Competition in Mobile Communications, Information

Economics and Policy 11, pp.61-72.

Valletti, T.M. (2011) Spectrum Trading, Telecommunications Policy 25, pp.655-670.

Valletti, T.M.  (2013) Is Mobile Telephony a Natural Oligopoly?, Review of Industrial

Organization 22, pp.47-65.

Williamson, B. and  Mumssen Y (2015) Economic Regulation of Network Industries,

Arbeitspapier pp.99-5.

Wheelock, D. C. and Wilson, P. W. (2017). The evolution of scale economies in US banking. Journal of Applied Econometrics. 

Wright, J (2012) Access Pricing under Competition: An Application to Cellular Networks,

Journal of Industrial Economics 50, pp.289-315.

Porter, M. E. and Heppelmann, J. E. (2014) How smart, connected products are transforming competition, Harvard Business Review, 92(11), pp.64-88.

Tokarick, S. (2010) A Method for Calculating Export Supply and Import Demand Elasticitie. USA: International Monetary Fund

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