Mechanism Of Collusion Between Telecommunication Operators And Its Impact On Firm Performance

With the development of 30 years, the telecommunication industry of China has madeconsiderable progress. But in the regulatory process, administrations emphasize greatly onartificial creation and realization the balanced market shares, but the dynamic roles ofstrategic behaviors of enterprises to impact on the industry market structure are ignored.Strategic behaviors chosen by a firm are an important part of strategic policies of it andexpress its management thoughts and theory and impact deeply on its operational efficiency,and then impact on the market structure. Collusion is an important part of strategic behaviors.Collusion is a coordinate behavior of competitors to avoid competition and appears readilyin the oligopolistic industry. Telecommunication industry is a typical oligopolistic industry,and there are enough proves to prove the emergence of collusion in telecommunicationindustry. For one thing, collusion between operators impact on their operational efficiency,for another, it also affects the effective competition and the sound development oftelecommunication industry.This paper applies on the industry organization theory, games theory, collusion theoryand enterprises performance determinism to research on the mechanism of collusion ofoperators and its impact on the performance of operators. The problems resolved by thispaper are four: 1. Reasons why collusion occurs between operators, and features and resultsof collusion of operators. 2. Influencing factors of collusion. 3. Features of collusion underthe product differentiation. 4. Influence of collusion on the performance of operators.There are four facts to prove the collusion of operators, the coordination agreement ofcollusive nature signed by operators; high monopoly prices and monopoly profits obtainedby operators; reaming charges in mobile telecommunication and executives swap ofoperators. These facts prove the existing of collusion for a certain degree. Collusion andprice wars between operators are linked closely. If collusion was broken, it easily convertedinto price wars. On the contrary, to avoid price wars, telecommunication administrationspromote actively collusion and coordination between operators. There are two reasons of collusion of operators. For one thing, collusive profits arehigher than competitive profits for two operators, so operators are willing to collude in orderto obtain the profits maximizing. For another, in order to preserve and increase ofstate-owned assets, telecommunication administrations don't want to see price wars betweenoperators who are all stated-owned enterprises, so they advocate that operators sign thecollusion agreements. The fundamental characteristic of collusion of operators is unstable.Firstly, if one operator adheres to collusion and another betrays it, the betrayer could obtainhigher profits than profits it obtains in collusion. But profits of the adherent would be lessthan profits it obtains in competition. Therefore, both of operators have the motivation tobetray collusion. Collusion is unstable. Secondly, according to"the trim strategy", to makeoperators maintain collusion for a long time and not betray, discount factors of two operatorsneed to both be larger than 0.5294. This is the condition of maintaining collusion. However,the discount factors of operators will change with time and environment changing.Sometimes, operators may pay more attention to the short-time profits, and it leads that thediscount factor is lower and adhering to collusion is hard. In other words, the condition ofkeeping collusion is too harsh to keep for a long time. The normal of collusion orcompetition between of operators is that collusion and price competition occur in turn. Theconclusion of"the trim strategy"is an ideal condition, and it's difficult to achieve in reality.Therefore, it's hard to operators to maintain collusion stability for a long time. However, forself-interest, operators have the willingness to collude with each other. Therefore, thesituation occurring likely in reality is that operators compete fiercely in prices for a periodand then carry on collusion and coordinate actively to replace the competition for theirself-interest. Through a period of stable market running,the price wars will occur again.Collusion of operators almost is unstable, in a small scale and for a short time in reality. Thereasons lead to the characteristics above of collusion are that discount factors of operatorsare small, asymmetric cost and market share of operators, homogeneous competition inproducts, the existence of cost of collusion and supervision and the threaten of punishmentfor betrayal is little, etc.The product differentiation can divided vertical differentiation and horizontaldifferentiation. The vertical differentiation is that all consumers admit the qualitydifferentiation. It means that in the period of achieving the better products, the firm designs the same price and different quality of products. The horizontal differentiation is thatproducts have significant differentiation in design, such as in variety, color and style, but theamount of resources needed in the manufacturing process is same. The vertical productdifferentiation has role to limit both price wars and collusion. At the first, the verticaldifferentiation is only controlled within a certain range (the alternative factor of operators b≥2.32288), there are the possibility and significance of collusion occurring. If the range ofvertical product differentiation of operators is too big, profits in collusion are less than incompetition, collusion will not occurs. So a great vertical differentiation can limit collusionoccurring. At the second, if collusion occurs under the vertical differentiation, with thedifferentiation bigger and bigger (but always has b≥2.32288), the discount factors ofoperators to keep collusion is less. It means that the vertical differentiation in a certaindegree is good to collusion and limit price wars. Under collusion, if the operator ofhigh-quality products keeps collusion not to betray, the discount factor of it is bigger than thediscount factor of operator of low-quality products. It shows that the profits of betrayingcollusion to the operator of high-quality products are greater than to the operators oflow-quality products. The operator of high-quality products is more likely to betray collusionand start price wars. This conclusion coincides with the price war between China Mobile andChina Unicom in reality.Collusion may lead to the reduction of the degree of the product differentiation; weatherthe vertical differentiation or the horizontal differentiation. Under the vertical productdifferentiation, if the profits of collusion maximize, the product quality of the operator ofhigh-quality products is lower than it in competition. It means that the product differentiationof operators is reduced. Under the horizontal product differentiation, the profits of operatorsmaximize if only to maximize the horizontal differentiation in competition. But in collusion,maximizing profits requires the middle horizontal differentiation. That is collusion reducesthe product differentiation. If collusion is broken, homogeneous competition in market willbe very seriously. Horizontal differentiation is bad to collusion stability, but the applicationof this conclusion is limit. Because the acquisition of this conclusion is to propose thatoperators reduced their products price but didn't change their locations. So the betrayalprofits are larger and keeping collusion is hard naturally. However in reality, operatorschange not only the prices but also the locations. Therefore the betrayal will be more complex and the analysis will be more difficult.This paper analyzes the influence of collusion on the performance of operators from theeconomic profits, cost efficiency, consumer satisfaction, and the innovation activities.Collusion can increase the profits of operators in a short-time, but from a long-term,collusion can reduce the cost efficiency and customer satisfaction greatly, and the monopolyled by collusion can lower the innovation power and influence negatively on the technologyinnovation, and even against the long-term competitiveness of operators. Collusion can alsolead to the lower of product differentiation and repress the product innovation power andreduce the competitive strength of operators for a long time. Therefore in the whole, theimpacts of collusion on the performance of operators are negative and it should be removedas much as possible. At last, this paper puts forward the strategy of removing collusion fromthe competition behaviors of operators, the laws and the government regulations. It alsoadvances a hypothesis to loosen the access system of telecommunication industry andintroduce a number of competitive entities based on the theory of contestable markets.