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The Australian Mobile Communication Industry.

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MANAGERIAL ECONOMICS 7103 MR. DAVID MURPHY ASSIGNMENT 2 - INDUSTRY ANALYSIS REPORT The Australian Mobile Communication Industry Word Count: 4156 Name: Thien Ming Foo ID: 1097241 Email: tmingfoo@yahoo.com Date: 25th April 2003 1. EXECUTIVE SUMMARY 3 2. INDUSTRY TRENDS 4 2.1 PRODUCTION 4 2.2 INDUSTRY PARTICIPANTS AND COMPETITION 5 2.3 PRICES 6 2.4 INVESTMENT 7 2.5 PROFITABILITY 7 3. DETERMINANTS OF CHANGES IN DEMAND AND SUPPLY 8 3.1 INCOME 8 3.2 NETWORK EFFECTS 8 3.3 PRICES OF RELATED GOODS 9 3.4 NEW USAGES 9 3.5 NUMBER OF SUPPLIERS 10 4. DEMAND ELASTICITY 11 5. THE NATURE OF THE COST STRUCTURE 12 5.1 SHORT-RUN PRODUCTION CURVE 12 5.2 SHORT-RUN COST CURVE 13 5.3 LONG-RUN COST CURVE 15 6. PRICING STRATEGIES AND INTERACTION BETWEEN OPERATORS 16 6.1 NEW ENTRANT'S PRICING STRATEGY 18 7. THE NATURE, EXTENT AND IMPACT OF GOVERNMENT POLICIES 19 8. RECOMMENDATIONS 21 9. BIBLIOGRAPHY 23 1. Executive Summary As requested by the investor, Murphy Inc, the objective of this research paper is to assess the viability of investing in the Australian mobile industry: to build and operate a next generation 3G mobile network. There are three main parts to this paper: the industry trends and statistics, in which the paper is based on; the analysis of the data using economic methodologies; and finally the investment recommendations. Firstly, the analysis in this research paper is based entirely on the same trends and statistical data sets that the Australian Competitive and Consumer Commission uses. The exclusive nature of the data and its quality serve as the robust foundation in which the analysis is built on. There is certain lacking in the data, however, such as insufficient granularity in terms of quantity demanded at different price level, the precise costs of the operators, etc. These data are necessary to derive greater precision in the analysis. Secondly, the analysis in this paper uses economic methodologies to assess the market structure of the industry. ...read more.


The three remaining new entrants, backed by solid foreign parent companies, will likely have the staying power to reach the critical mass - about half a million subscribers - thereby causing an increase in supply to the market. As the new networks have comparable features compared to the established players, price competition appears likely to be a key strategy. 4. Demand Elasticity Since there is no sufficiently granular data in terms of the change in quantity demanded, and the price of mobile service has been held constant for an extended period, it is not possible to compute the precise elasticity of demand. However, there exist conditions to conclude that the demand for mobile service is both price and income elastic. Two reasons suggest that mobile service is price elastic. Firstly, the cost of mobile service, in proportion to the income of a significant percentage of the user base, the residential users, is a big-ticket item. Any change in this already significant cost will likely compel the users to reappraise their expenditures. Secondly, fixed line service as a very affordable substitute is pervasively available with 99.75% of households covered by Telstra's PSTN network.4 The combination of the two factors, significance of cost and availability of substitute are likely to cause high price elasticity. The analysis in the earlier section indicated that rising income is one of main factor to cause the demand curve for mobile service to continuously shift to the right. The income effect hints that mobile service is at least a normal good or is positive income elastic. This can be further substantiated by research conducted for the mobile telephone manufacturer Nokia, which indicated that for the vast majority of Australians, the key reason for buying a mobile service is lifestyle considerations.5 5. The nature of the cost structure In this section, the paper analyzes the fixed and variable cost structure of the typical mobile service operator operating in an oligopolistic market. ...read more.


* High barrier and cost of entry - The entrance of new operators into the market will encourage the industry marginal revenue to eventually equal that of the demand curve, hence facilitating a market equilibrium that is allocatively efficient. However, the licensing requirement, high entry cost, and the network effects that the existing operators already have, all contribute to the lack of competition in the market. * Government conflict of interest - The government's majority stakes in Telstra presents a conflict of interest that disadvantages the private or foreign firm in entering or competing in the market. * Restriction of technological change - Technological change enables the operators to continuously innovate and implement new technology to derive greater efficiency and lower cost. This also allows the operators to compete based on performance and functionality differences. However, the restrictions currently in place favor those with economies of scope/scale and high network effects. To compete successfully in the Australian mobile service industry, Murphy Inc should therefore employ one of the following strategies, * If the firm is a foreign telecom operator, it should therefore seek to acquire or invest in one of the three dominant firms. This strategy is similar to the recent Singapore Telecom acquisition of Optus. This allows the acquiring firm to inherit the market power of the oligopolist, and to consolidate its international operations to further strengthen its economies of scope/scale. * If the firm seeks to establish its own infrastructure, it has to be a firm with a sufficiently large war chest. Given that the differentiation strategy is not possible, it would necessitate the firm to assume a price leadership strategy and sustain an extended loss period, as discussed in Section 6.1, before it builds up the critical mass and its own network effects. Such is the case of Hutchison 3G, backed by the namesake Hong Kong based conglomerate. As and when the firm reaches the economic breakeven point, then it has qualified itself a seat in the oligopolistic club of Australian mobile service industry. 9. ...read more.

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