Research On Competition In Telecommunication Market Based On Network Externality

Network externality is an important feature that differentiates the network industry from other industries. The telecommunication industry is a typical network industry and thus the network externality plays a very important role in the competitive telecom market.The efficient competition in this industry has all along been one of the major goals for telecom regulation in China. The telecom reform started from 1990s, targeting the breakup of monopoly, market competition and the development of telecom industry. By the end of 2007, 6 basic telecom operators existed through the separation of government regulation and business operation and the restructuring of carriers. Unfortunately the rational and efficient competition landscape had not yet taken its shape. In terms of strength and market share of those carriers, China Telecom, China Netcom, China Mobile and China Unicom now take the majority of the basic telecom market share and even among the four carriers, China Mobile leads the other three by wide margins in terms of subscriber base and increment, revenue and profits as well as growth, thus to establishes its superpower in the market with its dominance being enhanced constantly. All these signs indicate that the telecom market has become unbalanced and is getting more like an oligopoly.The regulation policy over full service operation as well as the reshuffle among telcos that will commence from the 3G licensing aim at, among others, some changes in the currently unbalanced telecom market and a rational competitive landscape. However the efficient competition among the carriers can not be achieved simply by full service operation and restructuring, and a series of associated policies regarding the telecom competition is very much required.This paper, based on the research on the network externality in the telecom industry, considers the scale (strength) of network externality differs among the telecom operators due to their discrepancies in subscriber base and network coverage. It tries to define the avail of network externality, which is used to measure the external utility to their subscribers brought by the network externality and draw the curve that depicts the changes in the network externality avail and analyzes the characteristics of these changes. By building related models, it tries to make an analysis of the telecom competition and entry into this market under the network externality, and finally arrives at an advice on how the government issues the associated policies over telecom competition to promote the efficient competition in the telecom market of China.This paper consists of 8 chapters. Chapter 1 is an introduction, Chapter 2 provides an overview of network externality theory, Chapter 3 describes the current competitive landscape in Chinese telecom market, Chapter 4 analyzes the network externality in telecom industry, Chapter 5 is about the telecom market competition under network externality, Chapter 6 tells the entry into the market by telcos under network externality, Chapter 7 offers optional policies and measures to facilitate the efficient competition in telecom industry and Chapter 8 ends by a summary of this paper and prospects, among which Chapter 4, 5, 6 and 7 are the core of this paper. Details about these chapters are listed below.Chapter 1: Introduction. It describes the background, content and purport of the research and provides an overview of research methodology, related theory, structure and innovative ideas of this paper.Chapter 2: Network Externality Theory. The externality theory, definition of network and network externality, network externality and network effects, utility function of network externality, market balance under network externality, positive feedback of network externality and the economic analysis of network externality have been illustrated.Chapter 3: Analysis of the current competitive landscape in telecom market. For the research on network externality of the telecom industry and its role in the market competition, it is to review and analyze the telecom competition in China. This chapter serves this purpose by reviewing the theory of introducing competition into the telecom market, taking you through the reform of the telecom industry and the current regulatory system, analyzing the competitive status in all the services in telecom market and the performance of the mainstream carriers. A conclusion is drawn that the telecom market in China is suffering from a severe unbalance and it may be a good choice to cultivate 3 to 4 full service providers that have comparable power by learning efficient competition theory and the best practice of the overseas markets.Chapter 4: in this chapter we make an analysis of the network externality feature in the telecom industry, and propose that there are entirety (the whole telecom network) and individual (down to each telecom carrier) layers in terms of the network externality. Here the concept of network externality avail is also proposed to measure the scale (strength) of network externality for each telecom carriers. The bigger the scale (strength) of network externality is, the higher its avail is, and the better the external utility to the subscribers of the carrier derived from its network externality. In the meanwhile the main factors impacting the avail of network externality for each carriers include the number of subscribers, network coverage, churn costs, installation and O&M costs. By use of Logistic Growth Model and the network externality theory, we draw an S curve of the network externality avail of the telecom carriers for a clear analysis of underlying characteristics for the changes. Thus we could come to competitive moves and strategies for those carriers under network externality.Chapter 5: it provides an analysis of telecom competition under network externality. Where a circular city model is adopted, the two-phase site selection and pricing for telecom carriers under network externality are analyzed, which provides the proof that if the network externality of a telecom carrier is bigger in scale (strength), there will be a monopoly in the market or even an oligopoly in an extreme case. It is thus suggested that the regulator try to mitigate the network externality of telecom carriers by adopting related policies for the purpose of efficient competition in the telecom market. Chapter 6: it analyzes the entry into telecom market under network externality. This chapter, using Stackelberg competition model, offers an analysis of the telecom players' entry into the market under the network externality. It proves that if the network externality of existing carriers gets bigger, the telecom market will gradually grow from competitive to non-competitive, the existing carriers becoming a monopoly. It is proposed that the regulator control the scale (strength) of network externality of the existing telecom carriers, prevent their externality from being excessively big to secure a competitive telecom market.Chapter 7: it offers optional policies and measures to facilitate the efficient competition in telecom industry. Considering the currently unbalanced telecom market, and based on the analysis of network externality, market competition and entry into market as mentioned in Chapter 4, 5 and 6, it is proposed that the regulator promulgate measures to reduce the network externality of the carriers, especially the dominant company, China Mobile for an efficient competitive landscape to take shape in our telecom market. Some on-target policies are suggested here, for an instance, China Mobile is imposed the policies like one-way number portability to other carriers, network facility sharing and regulation over market share.Chapter 8: Summary & ProspectsI may apologize that due to the limited time, limited efforts I have invested and limited personal capability, this paper leaves out a one-by-one quantitative analysis of subscriber number, network coverage, churn costs, installation and O&M costs that influence the avail of network externality of telecom carriers. These factors have different weight of influence on the avail. In the meanwhile a lot of details in this research are yet to be improved and worth further study.