TELECOMMUNICATION MARKET IN UAE

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TELECOMMUNICATION MARKET IN UAE

RESEARCH QUESTION
To what extent does the existing duopoly in the telecommunications sector in the United Arab Emirates encumber the growth of the market and efficiency?
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Abstract

This research paper is about the telecommunication market in the UAE. The essay will address the research question which is “to what extent does the existing duopoly in the telecommunication sector in United Arab Emirates encumber growth of the market ad efficiency. “The essay used both primary and secondary methods of research. The survey was conducted as a primary source while journals, online information, financial reports of the companies provided secondary sources of information. The essay first analyzed the duopolistic theory assumptions and then investigated and compared the behaviors of the two firms in the industry to the features of a duopoly. Moreover, the research paper assessed the duopolistic market structure of the UAE telecommunication market on efficiency and growth by comparing it to the telecommunication market of the United Kingdom. The variables compared between the two firms included the number of firms, pricing, percentage of mobile phone internet users, and the regulation of the industry. The essay also found some unique features of this industry that make it have monopolistic tendencies as much as it is a duopoly. From the research, market assessment, and analysis of the results, the paper concluded that the structure of the United Arab Emirates telecommunications market hinders growth and expansion. The factors that hinder the growth of the market from the assessment include artificial entry barriers between the two firms, high prices for the services provided, weak regulations as the government controls the market, lack of competition. This is unlike the telecommunication market of the United Kingdom which is liberated, has many operators, and charges low

Word count 267

Table of Contents

Abstract 2

List of Figures 4

1.0 Introduction 5

1.1 Reason and importance for the choice of topic 6

2.0 Approach 6

3.0 Theory 7

3.1 Assumptions of theory 7

3.1.1 Number of Firms and Type of Product 7

3.1.2 Entry barriers 8

3.1.3 Interdependence 9

3.2 Effects of assumptions 10

3.2.1 Price 10

3.2.2 Profits 13

4.0 Analysis of Telecom market in UAE 14

4.1 Number of firms and type of product 14

4.2 Entry barriers 15

4.3 Interdependence 16

4.4 Pricing 17

4.5 Profit 18

5.0 Important and unique features of the Telecom Market in the UAE 19

6.0 Evaluation of the UAE Telecommunication market in comparison to the United Kingdom market 21

6.1 Number of firms 21

6.2 Prices 22

6.3 Percentage of Internet Cell Users 27

6.4 Regulation 28

7.0 Conclusion 28

8.0 Bibliography 30

9.0 Appendices 32

9.1 Appendix 1 32

List of Figures

Figure 1 10

Figure 2 11

Figure 3 13

Figure 4 16

Figure 5 16

Figure 6: Total revenue from the annual report of Du in AED millions 18

Figure 7 21

Figure 8 22

Figure 9 23

Figure 10 24

Figure 11 24

Figure 12 25

Figure 13 26

1.0 Introduction

The advancement in technology has revolutionized the telecommunication industry for the past half a century. Through advancement in the telecommunication system, people can communicate, interact online, or virtually without physically seeing each other or through personal contact. Therefore, as technology advances, the need for efficient telecommunication service is of great importance. Therefore, the providers of telecommunication services need to provide consumers efficient and affordable products and services to their clients. The telecommunication market in UAE is a vast industry with two big firms controlling it, are Etisalat and Du. The Telecommunication Regulation Authority is the government body that regulates the telecommunication market in the UAE. Located in the Middle East, the United Arab Emirates has a large market share in telecommunication with approximately 8.2 million subscribers.[1] As much as the market is very big and is controlled by two companies, many challenges hinder the growth and efficiency of the industry. The telecommunication industry has been under a monopoly for three decades with Etisalat as the only company providing the services. However, the entry of Du in 2007 changed the monopoly of one firm to a duopoly.[2] Despite the expansion of the market share of Du, the industry has faced many challenges that hinder efficiency and growth, hence the research question “To what extent does the existing duopoly in the telecommunications sector in the United Arab Emirates encumber growth of the market and efficiency?

1.1 Reason and importance for the choice of topic

My interest in this topic came about coming across an online forum where people were complaining about high rates in the telecommunication industry of UAE. Until then I did not realize that the telecommunication firms were charging high for their services. However, when I checked online about how other countries were being charged, I came to understand why many people were complaining. Another reason was the presence of only two firms in this big industry and yet other countries like the United States had over 300 telecommunication service providers.

The research on this topic is of great importance because of the global economic trends and the need to revolutionize the telecommunication industry globally. For instance, the European Union are in talks on how to merge all telecommunication service providers to provide quality, efficient, and affordable services to consumers. Furthermore, the projection telecom industry by 2017 is expected to grow by $2.7 trillion globally.[3] With the stagnant growth rate of the UAE industry, there is a need to pinpoint some of the issues that have hindered the growth and provision of efficient service in this market. With the projection, the UAE should embrace itself to expand and meet the demands of the consumers as well as position itself strategically for the expansion in the industry.

2.0 Approach

The paper will first discuss the duopoly theory, its assumptions, and its implications. Secondly, certain aspects of the two firms’ operation in the UAE telecommunication market (Etisalat and Du) will be examined, and their relation with the duopoly theory established. Furthermore, the essay will compare and contrast the extent to which this telecommunication market conforms to the duopoly theory.

Thirdly, the duopolistic market structure effect on efficiency and growth will be determined by making comparisons with the telecommunication market of UAE and that of the United Kingdom. Lastly, the assessment will be done on the UAE telecommunication market, and the essay summarized in the conclusion.

The research used both primary and secondary methods of data collection. The survey was used as the primary method where 100 adults were sampled and surveyed through a questionnaire. Purposive sampling was used where any adult who was willing to participate filled the questionnaire. The secondary method involved using financial information of Etisalat and du, online sources, journals, websites of telecommunication firms in the UAE and UK, and textbooks

3.0 Theory

According to economic theory, a duopoly is a market scenario where only two companies own nearly all or all of the market for a particular service or product. The impact of the duopoly on a market can be similar to that of a monopoly if the two companies collude on output and prices.

3.1 Assumptions of the theory

Some of the assumptions of the theory are discussed below

3.1.1 Number of Firms and Type of Product

The number of firms actually in a duopoly market is usually two and they have dominant market control for their services and products. There are two forms or models of duopoly; Cournot duopoly and Bertrand duopoly. In Cournot duopoly, there is a competition between the two industrial firms and is based on the supplied quantity of products. The members of the duopoly mutually agree to divide the market. Therefore, the price each of the two companies will receive for the supplied products is based on items quantity produced, and the two firms react to the product changes of each other until there is equilibrium.[4]

On the other hand, in the Bertrand duopoly, the two firms controlling the market compete based on price.[5] Given that the consumers will buy the cheapest product between two identical products, this results in zero profit price as the two companies try to attract and get more customers, more profits through the cutting of the prices. Price undercutting threats means that this form of duopoly profits and prices are lower generally and the quantities higher compared to Cournot duopolies.[6]

3.1.2 Entry barriers

Entry barriers are particular circumstances to an industry that creates a disadvantage to a potential or e new competitor entering the market.[7] The entry barriers for a firm in a particular market can be created by the firms or even natural. According to Aghion & Maria (2010),[8] entry barriers can also be economic, technological, governmental, and institutional restrictions to participants’ entry into an industry or market

The four main entry barriers relevant to a duopoly are government restrictions, large economies of scale, and high startup costs. These barriers are the main reason for inefficiency and market control by limiting the competitor’s number and hence substitutes availability. According to Nero (2013),[9] the barriers that limit or hinder entry into the market supply-side mean that the buyers have fewer alternatives to buying, and this gives the firms greater control of the market. However, the barriers that limit or hinder entry into the market demand side means that the duopoly firms fewer options for selling and this gives the buyers greater control of the market.

3.1.3 Interdependence

In a duopoly, interdependence is the companies’ awareness about their competition in an industry and is a very significant character in a duopoly. The game theory illustrates how companies’ choices in a duopoly affect the outcome of the market “game.” The game is applied in duopoly to illustrate the interdependent nature of duopoly firms in decision making. One firm arrives at a decision that is based on the expected decision from the other duopoly firm.[10]

Jun & Xavier (2001)[11] concluded that the analysis of the interdependent nature of duopoly firms is that companies make decisions that are “lesser of the two evils” or “second best.”

3.2 Effects of assumptions

3.2.1 Price

Price is the value of a good or a service that will purchase it.[12] Similarly, it can be defined as the quantity of compensation or payment given by one party (buyer) to another party (seller) in exchange for goods and services.

In a duopoly, the assumption is that each firm in the duopoly takes into account the output of its competitors and its own output affects the price and its own profits. Another firm’s output decision will automatically affect the profits of the other firm in the duopoly, and therefore they act strategically by looking at what the other thinks or is doing. The firms in a duopoly are interdependent and their price changes are illustrated in the figure below.

TELECOMMUNICATION MARKET IN UAE

Where;

MC=the constant marginal cost

P1=price level of firm 1

P2=price level of firm 2

The PM= price level of monopoly

Figure 1

The optimum of Firm 1 depends on where the firm has a belief that firm 2 will place its prices. Setting the price below the competitor firm will result in market demand (D).however, for the other firm it is not optimal if it sets its prices just below the marginal cost as that entails negative profits. In simple terms, the best response function of firm 1 is p1“(p2). This will give it an optimal price for every pricing set by the other duopoly market competitor (firm 2).

Figure 1 illustrates the reaction function p1“(p2) of firm 1, with the strategy of each firm on each axis. It indicates that when P2 is below the marginal cost, that is firm 2 sets the price below the MC, prices of firm 1 at marginal cost will be P1=MC. Similarly, when firm 2 set the prices below the monopoly prices but above the MC, then prices of firm 1 will be below that of firm 2. However, when firm 2 set the prices above the markets monopoly prices (PM), then firm 1 will set prices at the monopoly level, that is P1=PM

TELECOMMUNICATION MARKET IN UAE

Figure 2

Since firm 2 and firm 1 has the same marginal cost, their reaction function on pricing is symmetrical in line with the 450 lines as illustrated in figure 2 above. The strategies of the firm will lead to Nash equilibrium where a pair of pricing strategies, in this scenario neither of the firms can increase profits changing price unilaterally. This is shown by the reaction curves intersection at point N in figure 2. At this point P2=P2 “(P1) and P1=P1 “(P2). As indicated in figure 2, point N is where the two firms are setting.............


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