Based On The Network Effect Between Japan And China Mobile Communication Industry

For any country in any era, long term economic growth always depends on technological progress. The diffusion of ICT technology is one of the major phenomena of technological progress, and the spread of mobile communications in China attracts our attention in particular. By August 2009 the number of users had exceeded 700 million, and there is no doubt that this is the largest telecommunication network in the world. Now the challenges in the Chinese mobile communications industry seem to have moved from a simple pursuit for penetration rate to industrial upgrading, to a decrease in regional differences, and more aggressive promotion of competition. From the point of view of industrial upgrading, the 3rd generation mobile communications (3G) services have only recently been introduced in China. This means that if China can realize a rapid diffusion of 3G services then mobile communications will certainly become a positive factor in the sustainable growth of China's economy. Looking at regional differences, naturally there are big differences in the penetration rate in different areas, and these will be resolved mainly through government policy. In terms of competition promotion, the escalating "price war" between operators from around 2002 has undoubtedly brought about a remarkable reduction in price, but the highly monopolized market structure has not yet significantly changed. Looking at these problems from the standpoint of the consumer, namely the demand side, we ask:what are the underlying reasons and what are the solutions?From the exposition of these viewpoints, this thesis offers a comprehensive empirical analysis of consumer demand for mobile communications. For the method, we employ panel data econometric analyses to obtain robust and relevant conclusions. Since econometric analysis is only applicable to the past, and given that the results may be affected by the unique characteristics of the Chinese market, it is therefore more appropriate to compare two different countries in order to understand demand structures and their implications on government policy. We select Japan for comparison, and employ the same methods and models as for the Chinese case. From studying the Japanese case, we find some commonalities and some lessons for Chinese mobile communications, providing policy implications for both countries.More specifically, we establish consumer utility models based on demand side concepts such as network effects, substitution effects and consumer heterogeneity. Empirical analysis on the two countries using these models generally produced significant and reliable results, illustrating the socioeconomic factors and differences in both countries' market structures affecting demand. For both countries, two different kinds of demand were estimated, namely demand for joining mobile networks and demand for calls on mobile phones. Analysis of the demand for joining networks found that the largest difference between the two countries was that the demand in Japan was mainly driven by product differentiation while the demand in China depended mainly on economic development. Common points were the negative substitution effect of PHS, the positive effect of industrial upgrading, and the insignificant effect of population age structure. Analysis of call demand found some differences in market structures between the two countries, with a very large difference in the effect of population age structure:in Japan, stronger product differentiation meant that price competition was not so intense as in China, so calling methods other than on mobile phones had stronger competitiveness; on the other hand Chinese consumers were not so interested in comparing between calling on mobile phones and other calling methods, since there was stronger price competition and weaker product differentiation compared to Japan. However, it was true for both countries that demand for calls was more price-elastic compared to demand for joining networks.In addition to network joining demand analysis and call demand analysis mentioned above, different kinds of analyses were applied to both countries:for the Chinese mobile communications industry, changes in switching costs were analyzed. The conclusion was that competitiveness of China Mobile, the largest operator in China, was becoming weaker, and the reason is most probably policy adjustment and the expansion of prepaid service. For the Japanese mobile communications industry, the spread of 3G services was studied. We found that coexistence of both competition and product differentiation played a major role in 3G diffusion, and that there was a common lock-in phenomenon, thus each operator's 2G service market share had strongly affected its market share of the 3G service.This thesis is divided into five chapters:The first chapter is the introduction, providing a brief explanation of the background and purpose of this study, a summary of existing literature, thesis structure and study methods.The second chapter introduces the theory. This chapter first explains and defines some theoretical concepts which have been commonly used in previous ICT industry consumer demand analysis such as network effects, substitution effects, switching costs, and heterogeneity of consumer tastes. Second, we discuss how to apply these to real situations, and it is decided that our network joining demand model should adopt assumptions of consumer taste heterogeneity and dynamic change in the potential number of users.The third chapter is an analysis of mobile communications in China. In network joining demand analysis, we find that:a rise in income level and a reduction of mobile communications price level both had positive effects; the network effect of a fixed line phone exceeded its substitution effect, while the network effect of PHS was lower than its substitution effect; an increase in the use of the Short Message Service (SMS) to send messages had a positive effect. In calling demand analysis, we found that:the network effect of mobile phones was weaker than the effect of a reduction in average taste level resulting from network expansion; the effect of mobile communications price level was very large and significant; urbanization also had a positive effect; the relationship between demand for SMS and that for calling were complementary. In switching cost analysis, the results revealed that:China Mobile had a strong competitiveness compared to other operators, while its power was becoming weaker; China Mobile's competitiveness was weaker in prepaid services than in postpaid services.Chapter four is an analysis of mobile communications in Japan. From the point of view of product differentiation, this chapter briefly introduces the state of competition in the Japanese mobile communications market and recent changes in the policy environment. In network joining demand analysis, we found that:an increase in 3G users as a proportion of total mobile users and non-price competition (HHI decrease) both had a positive effect; the fixed line phone penetration rate had a very significant, large negative effect; in calling demand analysis, we found that:the proportion of the population between 15 years old and 65 years old had very large positive effect (the negative effect of aging and smaller number of children), with a coefficient above 11. The PHS penetration rate and fixed line phone penetration rate both had a positive effect; a rise in 3G as a proportion of mobile phone users reduced calling demand. In the 3G demand analysis, the results revealed that each operator's individual characteristic factors were able to explain over 90% of the 3G demand structure. Finally, the chapter compares the estimation results of both countries. We reveal that the differences in demand between the two countries are due to the different stages of economic growth and market structure, namely, a different level of product differentiation, while we could not see any substantial differences in the two countries'consumers.Chapter five presents our conclusions. This chapter mainly discusses policy implications; especially concerning the relationship between product differentiation and industrial policy. We conclude that we should make industrial policy with sufficient consideration of the merits and demerits of product differentiation, and policy proposals for both countries were provided:China should pursue a decrease in HHI; Japan should maintain its limit on product differentiation at an appropriate level.