Economics: Overview of the Telecommunications Industry

Running head: ECONOMICS
ECONOMICS
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Executive Summary
Australian telecommunication sector has grown hugely in the past years and the rate of growth
has been greater in the bigger firms. Similarly, the telecommunication sector has successive
grown in New Zealand and UK. Market concentration of the telecommunication sector in these
economies are analyzed with respect to the Herfindahl-Hirschman Index (HHI). The economic
profits and market structure of these economies are analyzed with respect to the market
concentration value. The price of the goods are analyzed and in case of high prices, several
government policies are denoted.

Table of Contents
Introduction......................................................................................................................................4
Discussion........................................................................................................................................4
Market structure and concentration of the telecommunication industry in Australia, UK and New
Zealand............................................................................................................................................4
Attainment of economic profits with respect to premiums in pricing.............................................9
Strategies used by government to lower the prices and its impacts..............................................10
Conclusion.....................................................................................................................................11
Reference List................................................................................................................................13

Introduction
The telecommunication industry is a huge industry that comprises of the provision of
services like wireless connections, communication equipment, long distance carriers, domestic
and foreign telecom services, broadband and mobile networks. Fixed broadband and mobile
phone services are the two most used services in the telecommunication industry. Australia has
one of the most successful sectors where the market structure is highly competitive and the
revenue has successfully grown in the past years. The shift from wired source of
telecommunication to wireless networks has effectively increased consumer demand in these
areas of data connectivity and mobile connections in New Zealand, Australia and UK (Bhatti,
Abareshi & Pittayachawan, 2017). The aim of the paper is to determine the market concentration
of the telecommunication industry in New Zealand, UK and Australia and denote the market
competitiveness in these economies.
Discussion
Market structure and concentration of the telecommunication industry in Australia, UK
and New Zealand
The Australian telecommunication market has been dominated by big firms like Optus,
Telstra, NBN Co Limited and Vodafone Hutchison Australia (VHA), who had generated huge
profit margins in the past years. Mobile subscriptions has significantly increased in the past
years. Thus, the market structure of the telecommunication industry is oligopoly where the
market is mainly governed by few big firms who has extracts huge revenues. Oligopolistic
market structure is governed by few firms with infinite number of buyers. These firms provide
more or less similar prices that is differentiated by quantity, pricing, services and advertisements.
Firms under an oligopolistic market are dependent upon each other as one’s strategy will have a

significant effect on other firms (Behl, 2015). They try to keep a high price and refrain new firms
from entering the market. They try to compete in the market with respect to higher sales and
market shares. Manufacturers try to get hold of the market by owing a greater piece of the market
share. A market is said to be concentrated when it is dominated by big firms who has huge
market share (Locke, & Cave, 2018). Thus, it can be sad that Australian telecommunication
sector is highly concentrated which will be calculated in the future.
There are two big firms in New Zealand in the telecommunication sector who has greater
market shares than the other firms. Vodafone and Spark dominates the market with a market
share of about 49 and 32 in fixed broad band services. Similarly, in case of mobile services the
sector is effectively dominated by Spark and Vodafone. Thus, these two firms have about 35-45
percent of the market share. There are other firms like Calipus, Orocon, 2 degrees and other
small emerging businesses who has a significant share of the telecommunication market in New
Zealand with respect to core effective outcomes (Gul, Sarkar, & Gutierrez, 2016). It can be said
that the market structure is highly competitive which will be demonstrated with Herfindahl-
Hirschman index that used to study the market concentration.
In United Kingdom, the market structure of the telecommunication industry is
oligopolistic with small number of big firms who can influence the market. The sector used to
bring back huge profits in the previous years. However, the rate of growth has slowed down in
the recent years. The dominance of the industry has been significantly lower as the firms are
losing shares and more firms are entering the market (Hayaloğlu, 2015). The effective outcomes
can be denoted by the change in several factors that has led to such outcomes. As a result, the
market concentration has been lower which will be evaluated later in the paper. The total market
share in the telecommunication industry in UK is shared by many firms like EE, O2, Vodafone,

Sky, Talk Talk, Virgin Media, BT, Virgin and others, which makes the concentration
significantly lower.
The market concentration is calculated by using the Herfindahl-Hirschman Index (HHI)
which is calculated by adding the square root of the percentage share in each market and then
adding them. The values can range between zero and 10,000 as per the concentration in the
market. The concentration ratio is a combination of market share of all the biggest firms in the
telecommunication industry. The share of the market can be indicated by employment, sales and
other relevant indicators. When the value of the ratio is extremely high then it is said that the
firms in the respective industry is highly concentrated.
Suppose there are ‘n’ number of big firms in the industry. The percentage of market share
of n firms is represented by the sn. The value of sn cannot be a decimal number and has to be a
whole number (Khasanova, & Fazullina, 2015). The industrial concentration is used to denote
the market structure of the industry which is dominated by few big firms who has an effective
share of the market. The formulae for estimating the Herfinfdahl-Hirschman Index is given
below:
HHI= S12 + S22 + S32 +…. Sn2
A highly concentrated market structure will have a monopoly market structure such that
the values are near to 100 percentage which is similar to 10,000 in the value of Herfindahl-
Hirschman Index. The value of HHI will be near to zero when the firms are perfectly competitive
such that there are infinite number of buyers and sellers in the market and nobody is able to
influence the market. Firms are not concentrated when value lie below 1,500 ad form a perfectly
competitive market. Values lying between 1,500 and 2,500 represent that the firms are

moderately concentrated meaning that structure is oligopolistic (Lichtmann, 2019). A value
greater than 2,500 ensures that market structure is highly concentrated with large number of
bigger firms dominating in the market.
Table 1: Market share and HHI for fixed broadband sector in Australia, New Zealand and UK
respectively
Source: As created by the author
The Herfindahl index is effective for understanding the market concentration of the
telecommunication industry in Australia, New Zealand and UK respectively.
The HHI value of telecommunication industry in UK is 2,155 which suggests that the
market structure is moderately concentration leading to a moderate oligopoly. In Australia and
New Zealand, the market structure is highly concentrated such that the market is oligopolistic
with the existence of big firms.

Table 2: Market share and HHI for the sector relating to mobile phone services in Australia, New
Zealand and UK respectively
Source: (As created by the author)
Similarly, from Table 2 the HHI for mobile phone services is estimated. In UK the value
of HHI is lower than 2,500 that is 2,277 which ensures that the firm is moderately competitive,
as in case of fixed broadband. Market structure for mobile services in Australia and New Zealand
is highly competitive such that few number of big firms dominate the market. In UK there are
five big firms and the rate of domination is comparatively lower than New Zealand and Australia
(Groff & Salihovic, 2016). There are only three firms in New Zealand and four firms in
Australia. That is why market domination is the biggest in New Zealand with only three
dominating firms, net to which comes Australia with four firms. The lowest is seen in UK with
five firms whose market shares are comparative lower that shows that market dominance is
comparatively low. This low value denotes that the top five firms in the industry cannot
influence the market.

Attainment of economic profits with respect to premiums in pricing
Market concentration has a quality relationship with pricing with respect to the market
structure. When the market structure is highly concentrated firms are bale to change high price
because the consumers does not have much option. As the concentration goes down, firms are
unable to dominate the market (Bhatti, Abareshi, & Pittayachawan, 2017). It is not necessary that
market domination is attained by higher price. However, when the number of firms are lower,
they follow a high price to retain super normal profits. However, a firm can dominate the market
with respect to its quality services, brand value, advertising and provision of goods at a low cost.
Thus, price plays a huge role in understand the concentration of market and the way the big firms
dominate the industry (Coutts, 2015). The effective outcomes can be denoted by ways these
firms behave in order to extract supernormal profits. The pricing market in the
telecommunication industry can be affected by the change in core business outcomes
Mobile and broadband services has been a necessary good for the consumers these days
with the increased usage of social media and other services. Data is required on a daily basis to
do day to day transactions, paying bills, and buying stuffs, gather knowledge and transportation
services. Australian mobile subscribers has increased due to the provision of the product at a low
price. The big Australian firms are competing to keep a low price that can effectively enhance
their profit margins (Gregory, 2018). When the market concentration increased hugely in the
telecommunication sector, firms started charging a high premium price that has affected the
profits. As results, firms are again fighting with respect to price competition that enables big
companies to change lower rice and raise its sales.
Although, the telecommunication sector in Australia charges a lower price, the price level
is more than that of New Zealand’s telecommunication industry. It charges a price that lies below

the OCED price level that has huge market potential (Barry, 2018). Firms like Spark and
Vodafone has effectively reduced the price level that enabled to extract huge profit. However,
the price for Telecommunication services is comparatively higher in UK which proves why the
market concentration is moderate in UK.
Price and demand are negatively related such that a low price raises consumer interest
and demand, which leads to huge sales and helps to extract super normal profits. Price for
telecommunication serves has significantly increased in the industry such that firms are able to
change the way services are provided to the customers (Bykova, 2017). Thus, it can be said that
New Zealand is the biggest winner in the market due to provision of mobile network and fixed
broadband services at low price which helps to extract huge profits. Although, Australia’s profit
is lower than New Zealand, the Australian telecommunication sector is a winner due to
extraction of super normal profits at low price level and highly concentrated market structure.
UK is losing in the losing in telecommunication market.
Strategies used by government to lower the prices and its impacts
The price in the telecommunication industry in Australia is not competitive and the
government is trying hard to develop the National Broadband Network (NBN). NBN is a
government infrastructure projects that is designed for the provision of high quality data
communications across the economy. The purpose is to drive the gap in digital service that gives
the access to reliable and faster broadband connections (Park et al. 2015). This will help to serve
organizations and individuals. The project hires several people that provides them with
employment opportunities. NBN has effectively improved performance of the businesses
through provision of data services at cheap rates. Apart from this, government is trying to
introduce new wholesale pricing options that will help consumers to buy the services at

competitive low prices. It had negative impacts as well because the total budget for the project
significantly increased in the past five years from 2013 (Lichtmann, 2019). The effective
outcomes can be felt as a change in cost effective outcomes that lower the aggregate price of
telecommunication services.
The government can serve the networks at competitive low price by lowering the tariff
rate that will lower the price level and help to extract super normal profits. Thus, consequences
will be increased sales and outcomes (Groff & Salihovic, 2016). However, government banned
the provision of Chinese giant Huawei that could have solved the pricing problems and provide
them at a lower price. Thus, it can be said that the government of Australia has effectively
invested in NBA and other funds that has lowered the price of data services and other
telecommunication facilities. However, it has caused problem by lowering the government
budget in other things or there has been problems of increased government expenditure for NBA.
Conclusion
The telecommunication industry in Australia, New Zealand and UK is Oligopolistic in
nature where the market is influenced by a small number of firms. Market concentration is
studied by using the Herfinfdahl-Hirschman which shows that the market structure is highly
concentrated in Australia and New Zealand. The telecommunication sector in UK is moderately
concentrated due to presence of four bigger firms with several smaller firms. The sector is mostly
concentrated in New Zealand which is influenced by two or three firms, whereas Australian
telecommunication sector is dominated by three or four firms. Economic profits are maximum
for countries who has a highly concentrated telecommunication market like New Zealand and
Australia due to the attainment of price premiums. The Australian government tries to lower the
price of telecommunication serves by providing networks facilities that makes communication

easier at low prices. It is creating a National Broadband Network for providing high quality data
at cost effective prices.

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