Oligopoly in US Cellphone Market

This paper discusses the characteristics of oligopoly market in reference to cell phone market in US, including collusion, competition, price war, and network effects. It also analyzes the impact of mergers in the market, including effects on consumers' price and competing strategies of other cellphone firms in the industry. Arguments for and against mergers are also presented.

Running head: OLIGOPOLY IN US CELLPHONE MARKET
Oligopoly in US Cellphone Market
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Table of Contents
Introduction......................................................................................................................................2
Characteristics of oligopoly market.................................................................................................2
Oligopoly characteristics of US cellphone service market..............................................................4
Collusion in the oligopoly...........................................................................................................4
Oligopolistic competitiveness......................................................................................................4
Price war......................................................................................................................................5
Network effects cellphone market...................................................................................................5
Longer-term impact of mergers in the market.................................................................................6
Effect on consumers’ price..........................................................................................................6
Competing strategy of other cellphone firms in the industry......................................................7
Arguments for mergers................................................................................................................8
Arguments against mergers.........................................................................................................9
Recommendation.......................................................................................................................10
Conclusion.....................................................................................................................................10
References list................................................................................................................................12

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Introduction
The term market in its simplest form refers to a place where buyers and sellers meet with
each other and engage in transaction of a particular commodity. Traditionally, market thus
indicates a place having small and big shops, stalls and different sellers selling a variety of
product. Economic definition of market however is different from traditional definition.
Economists consider market as an arrangement where sellers and buyers come in contact with
each other either directly or indirectly to exchange commodities. Subject to the number of buyers
and sellers and presence of competition market is of different types (Frank & Cartwright, 2013)
The four commonly is discussed market structure include perfectly competitive market,
monopoly, monopolistic competition and oligopoly. Focus of the paper is to discuss
characteristics of an oligopoly market in reference to cell phone market in US.
Oligopoly indicates a market form characterized as the dominance of small number of
firms for a given product. The characteristics of US cell phone market resembles the features of
an oligopoly market. There are four major service providers in the cell phone market namely
Verizon, AT & T, T-Mobile and Sprint. The strategic interaction among the forms results in
intense competition in the market.
Characteristics of oligopoly market
There are some distinct characteristics of oligopoly market that separate it from other
forms of market. Given below are some of characteristics of an oligopoly market
Interdependence
Interdependence among firms in taking various decision in the market is the foremost
feature of an oligopoly market (Moulin, 2014). For example, if one firm engage in advertising

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that can attract more customers, the rival firms in the industry follow the same to attract more
buyers.
Number of firms
Oligopoly market is characterized as being dominated by a relatively small number of
large sized firms. As a result, each firm has a considerable market share in the industry. This
leads to concentration in the market. Market power of oligopolistic firms though is less than
monopoly market but is definitely greater than monopolistic competition.
Nature of product
In an oligopoly market, firms sell either homogenous or differentiated product. Oligopoly
market with homogenous product is known as pure oligopoly while market with differentiated
product is known as differentiated oligopoly (Baumol & Blinder, 2015)
Barriers to entry
Market power of firms in the oligopoly market is retained through prevalence of high
entry barriers. Different forms of entry barriers in the market include ownership of a specific
resource, patents, high fixed cost to start up the business and different government restriction.
Competition
Presence of high competition is an important characteristics of oligopoly market. As there
are only a few dominating sellers in the market, any strategy of one firm affects the rivals. Firms
always keep a watch over the strategy of rivals to take a counter move (Nicholson & Snyder,
2014) This leads to high degree of competition in the market. Firms engage in both price and
non-price competition.

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Oligopoly characteristics of US cellphone service market
The telephone market of America is largely dominated by four major companies Verizon,
AT & T, T-Mobile and Sprint Nextel occupy almost 89 percent market share in the industry.
AT&T purchases cell phone companies. The Stackelberg model of oligopoly is observed in the
cell phone market where AT&T acts as a leader. It takes output decision before its rivals. The
competitors did not react to T-Mobile’s decision of raising price (Kang et al., 2017). The
decision to decrease price however is immediately followed by the rival firms. The several
oligopolistic characteristic of US cellphone service industry is discussed below
Collusion in the oligopoly
A common feature of oligopoly market is the collusion between rival firms. Collusion is
defined in terms of offered price and product quality in the market. Firms attempt to increase
maximize their joint profit by colluding with competing firms. In the American cellphone
market, AT&T and Verizon have engaged in collusion. Price decrease after the collusion
followed by compulsory subscription to a more expensive data bundles by customers of the two
companies. This even involved purchase of smartphones by the customers. The collusion
resulted in an increased price in cell market and sharing of market.
Oligopolistic competitiveness
Fierce competition is another important feature of oligopolistic market. The oligopoly
market of American cellphones best describes this feature. There is cut throat competition among
the existing players in the market. T-Mobile takes the strategy of lowering price of the service to
attract more customers. The competing companies have focused on improving quality of the
service by providing a much faster internet network. T-Mobile also takes the strategy of product

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differentiation (Gao et al., 2013). There are 7 different call plans to be utilized by the customers.
As against this Sprint has 7 different call services. Verizon has turned to the leader in the field of
internet provision. The customers of Verizon pay a different rate for different place at different
time. AT & T and Verizon are able to offer a diversified services including funky caller tunes
and features of voicemail that record time and voice of the person called.
Price war
Price competition is another distinctive feature of oligopoly market. In the cellphone
industry most aggressive price war is observed between Verizon and AT & T. To increase
market power, they also involve in innovation and adding creativity in this field. In the beginning
of the year, both the companies have announced to reduce the charges for packages offering
unlimited voice call. Collusion however has also been noted as both the company are interested
to make the customers chose the expensive packages (Bernhardt & Taub, 2015) In various
occasion, T – Mobile lowers price of existing packages which is followed by its rivals. Verizon
and AT&T also set their price individually and hence there is a tug of war of prices in the
industry.
In addition to the above mentioned features, other similarities of US cell phone market to
that of an oligopoly market include existence of high entry barriers and interdependence among
the rival firms.
Network effects cellphone market
Network effect also known as network externality indicates economies of scale arise from
demand side factors. This is the value added to the product or service offered by a business
because of increase in number of users of the particular product or service (Ran, Liu & Jiang,

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2017) In the presence of network externality, value of the product varies depending on the
number of users.
A prime example of market where network externality is present is the cell phone market.
Previously, not many people owned cellphones because of excessively higher price.
Consequently, purchase of cell phone by individual had negligible impact on others (Giachetti &
Marchi, 2017) With passes of time there is however development of new technologies leading to
a decline in prices. The features like texting, camera and others increased the benefits from
having a cellphone. The growing connectivity among people results in a network externality in
the cellphone market. Connectivity to internet further aggravates this impact. As more and more
people uses cellphone having some specific characteristics its market value increases. The
network effect interrupts in fair competition leading to dominant position to some group of seller
(Cecere, Corrocher & Battaglia, 2015) The strong market position determined by the dominant
number of users increases market power of the dominant firms, a typical feature of oligopoly
market.
Longer-term impact of mergers in the market
The competing firms in the oligopoly market often collude or merge to increase their
joint profit (Gugler & Szucs, 2016). The recent initiative of T-Mobile and Sprint to merge has
long term implication both on customers and existing companies in the industry.
Effect on consumers’ price
The advocates on part of the customers’ fear that the merger will hurt low income
customers the most in terms of an increasing cost of pre-paid and other mobile plans. The deal
between the third and fourth largest US carriers is expected to increase prices of different call

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and data packages. This will hit the hardest to the low income household as they are left with a
relatively small set of alternative as a mean for communication (Grewa et al., 2016). The higher
price might force the customers to look for some cheaper alternatives. The share of T-Mobile and
Sprint in pre-paid market for US are 38 percent and 16 percent respectively. Merging thus leads
to the combined company to hold a share of 54 percent. Lower income customers will face a
sharp price increase as T- Mobile and Sprint are the only two option for them. The Chief
executive of Sprint however is of the view that merging will improve pricing strategy because of
the strong network effect resulted from the combination of two companies. Sprint and T-Mobile
sell airwaves to the smaller wireless service providers who serve the low budget customer. After
merger, the ability of low cost negotiation will also be hurt. The retail wireless industry has
experienced a decline in prices in the last few years (Dang & Bartz, 2018). Merger will bring an
end to this trend. The deal though is good for the market but it hurts interest of the customers.
Earlier the price competition between the two company brought down the prices to a
significantly low level. This bottom level price competition will not exist anymore after the
merger.
Competing strategy of other cellphone firms in the industry
After merger between T-Mobile and Sprint, the effective number of dominating players
in the cellphone market reduces to three. Intense competition among the rivals is one feature of
oligopolistic market. Apart from price war, firms also involve in non-price competition to
increase their customer base.
Product differentiation is one way to compete in the market. T-Mobile alone has
7different types of call plan. Sprint has 9 different call plans. The merger between Sprint and T-
Mobile would result in 16 different types of call plan offered by the combined company.

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Customers thus get a wider choice for selecting the call plan (Fung, 2018). In order to compete
effectively, the remaining firms need to focus on brining variation in call plan.
The said merger would increase network coverage of the combined company. Following
this, the rest two companies might give attention to increase their network coverage to attract
more customers. In the internet world, 5G connectivity us expected to provide a faster
networking service. The competing players in the industry are attempting to launch the next
generation networking through introduction of 5G. With merger however the 5G roll out for the
combined company would speed up. Merger has an enormous effect on speed of arrival of 5G.
The merged company would give a tight competition to the dominating players AT & T
and Verizon. The joint customer base can on match the large number of customers of the
Verizon and AT & T (Peitz & Valletti, 2015) The merger would put pressure on leading
cellphone companies to retain and attract customers. This would lead to a more intense
competition among the three players.
Arguments for mergers
Supporters of mergers provide several arguments in favor of merger between T- Mobile
and Sprint indicating the beneficial impact of mergers in the cell phone industry. The first
beneficial effect of merger is the greater network coverage. The spectrum of wireless network is
finite. Merger of two small networks lead to a larger network connectivity covering a larger area
(Boyson, Gantchev & Shivdasani, 2017) In the last ten years, T – Mobile has enjoyed a rapid
growth. The biggest hurdle faced by the company however is the spotty coverage. Sprint on the
other has a lot a spectrum. Combination of the two firms thus will be beneficial for customers of
both network.

9OLIGOPOLY IN US CELLPHONE MARKET
The merger has the potential impact of speeding up effect of 5G network. 5G is a much
bigger deal compared to LTE. All the leading service wireless service providers are attempting to
introduce a faster and next generation network (Thacker & Wilson, 2015) With an increase in
bandwidth and a much wider spectrum, the merger would have a great impact on speed and
delivery of new 5G network.
Until the merger, despite being a major player in the cell phone industry T-Mobile still
lacks behind the dominating players such as Verizon and AT & T. The proposed merger is able
to give an instant boost to subscriber base for both the companies and increase their competitive
power.
Arguments against mergers
Despite some well-defined benefits from merger between T-Mobile and Sprint, there are
some obvious adverse effect of the merger. The merger of Sprint with T- Mobile would give the
combined company a considerably large market power on the pre-paid market which is not
favorable for the poorer section (Genakos, Valletti & Verboven, 2018) The combined entity
would have much power to charge a higher price for different plans. It is easier to coordinate
price in a market with three players compared to a market having four players.
The cell phone market in US already has high concentration. Allowing any merger would
further aggravate the situation leading to an increase in combined marker power of merged
companies (Balan et al., 2015). The merger would make the combined company as a nationwide
operator having a smaller band spectrum with an enormous existence. This not only have long
standing and unpleasant competition for US cell phone market but also hampers connectivity
within the US as a whole.

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Recommendation
The Federal Communication Commission should consider the arguments for and against
the proposed merger. The FCC need to determine whether the merger addresses public interest or
not. If FCC finds that the merger would not benefit common people, then it should deny the
merger or allow it with some imposed conditions. The Justice department can sue the existing
companies to stop the deal or force them to oblige the conditions (Curwens & Whalley, 2017) In
the Obama era the merger between T-Mobile and Sprint was prevented in 2014 and also
dissuaded take-over of T-Mobile by AT&T. The Trump regime however is more industry
friendly. FCC should consider all the relevant issues of the applicants in an efficient way. The
commenters and petitioners should raise all the possible issues. FCC is required to critically
review the public interest considering the interest of both companies and customers in the
cellphone industry.
Conclusion
The cell phone service market in US is oligopolistic in nature having four dominating
firms. Several oligopolistic features of the market include interdependence among firms,
collusion, high degree of price and non-price competition and high entry barriers. Network effect
or network externality is one vital feature of cell phone market. It is the additional value added to
the particular service followed by increasing number of subscribers. The positive influence of
increasing number of users in the cell phone market increases competition among the rival firms
to outweigh market share of each other. In such a concentrated market merger between firms
have a long term influence on customers and other rival firms. The merger between T-Mobile
and Sprint has similar consequences in the market. The merger is expected to hurt low income
customer through increased price of different subscription plan. The positive side of the proposed

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merger include creation of a viable 5G network, improve service quality and wide coverage.
Finally, the Federal Communications Commission should consider both side of the
merger agreement before taking the final decision.

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