Creating a perfect storm for healthy competition

This article appeared originally in Gulf News: link to original article

Can the telecommunication market in the UAE be considered a perfect competition? I asked myself this question and concluded with the answer that competition should exist first before it could be categorised as a perfect one.

And the right question to ask here is: Does having more than one operator mean there is a competition which could be considered a healthy one before it being a perfect one? To answer that, let’s get into the different classifications of markets and where the UAE’s telecommunications market fit in that context.

Markets can be classified into three broad categories: a monopoly, an oligopoly, and a perfect competition. In a monopoly, a single company could decide what price it would like to charge customers and go ahead with it regardless. In such a case, you get no other option anyway.

In an oligopoly, a few companies could be operating at the same time. However, what would be quite apparent is who’s dominating the market. So what if the case was two companies and no other?

The last market category is perfect competition. There is no specific number of companies that should operate in a market to mark it as a perfect competition. Though a distinct feature is that no single company has an upper hand in influencing prices.

Knowing what has been just explained, what market type fits the telecommunications market in the UAE? Today’s report will explore this in detail while briefly referring to game theory in connection to market classifications.

Game theory is generally about the options each of the two players have in a fixed setting to result in a zero-sum. Meaning, what one player gains is what the other player loses. This could be, for instance, what happens in the stock markets and whatever gain you make is another’s loss, more or less.

Now to connect this to the telecommunication markets in the UAE, game theory does not apply with a single operator in the market. It might be in place here … but only to a certain extent. Allow me to explain this.

In a controlled environment, when operator A raises prices, three scenarios would take place.

1. Operator B collaborates and raises prices where they will all share the profits of the same market population,

2. Operator B keeps prices at par and would possibly cut into operator A’s market share and profits,

3. Operator B lowers prices and definitely cuts into operator A’s profits. Can you guess which scenario applies to the telecommunications market in the UAE?

Before 2006, the market was a pure monopoly. That is, the sole operator gets to fixate whatever prices it would like to charge customers, and customers have to pay anyway because there is just no other option. That other option was introduced in 2006.

There were different concepts introduced and different pricing mechanisms, but that doesn’t really matter if price is reduced somewhere and raised somewhere else. That doesn’t matter either when there is another way to overcharge customers.

To illustrate, consider purchasing a data plan from a telecommunications operator, let’s say of 20GB. In a given month, it just happened to be the case that you were connecting to every single Wi-Fi connection you could find wherever you go, and you haven’t fully utilised the 20GB.

The normal scenario would be for the remaining data allowance to be transferred, even if only partly, to the following month. Instead, you are being required to purchase another plan though you haven’t used it all.

So the market is no longer a monopoly, but it doesn’t qualify to being an oligopoly either because there aren’t any other smaller operators. Can you guess now which game theory scenario applies to the market? To explain more, let’s consider makers of sugar-sweetened beverages.

Despite having a few sugar-sweetened beverages makers, Pepsi and Cola are the most dominant in terms of market share and sales too. Prices are increased in coordination, and sizes are also made smaller cordially. Where does this fit into the above explained game theory scenarios?

The first. The defining factor for each of the two, Pepsi and Cola, is their recipe and their marketing strategies. And in such a market environment, one can call Pepsi and Coke perfect substitutes for indifferent customers.

Therefore, customer loyalty plays a major role in an oligopolistic market and is key in forecasting who would switch to what brand and who wouldn’t. For example, Coke drinkers are not normally happy with having Pepsi in a restaurant because the latter serves Pepsi drinks only.

With the Pepsi-Coke example explained, does the telecommunications market in the UAE fit the description? It does in two aspects: customer royalty and the way prices move … upwards or further upwards that is.

What wouldn’t let the market qualify as a fully-fledged oligopolistic one is that there are no other small operators. There is one main commercial reason quoted normally when justifying that: a relatively small population.

So to investigate this, I looked into other countries of slightly smaller or bigger populations to check how many operators exist in each of their markets. Not just that, I added an additional filter of GDP per capita, benchmarked with that of the UAE, to make it a fair comparison. All information is based on 2013 data.

Austria and Switzerland have smaller populations than that of the UAE and a higher GDP per capita. Yet they each have three telecommunication operators.

Sweden, with an almost the same population size and a GDP per capita that is almost 1.5 times that of the UAE has four telecommunication operators. Belgium, with a 20 per cent bigger population and about the same GDP per capital has three telecommunication operators.

Now someone might argue that a few of these operators might be present in other European markets and so could afford lowering prices in a given market. Well, so is one of the operators in the UAE. Actually, a monopolistic market is supposed to provide a country’s company with the resources to then establish itself regionally or globally.

That, with proper competition back home would allow the former company to bring better services to its mother country. As we all know, that isn’t the case.

So the market here isn’t a monopoly, doesn’t qualify as an oligopoly, and is as close to being a perfect competition as Jupiter is to becoming the centre of the universe. To add insult to injury, a list by Akamai Technologies states the 10 countries with fastest internet connection speeds in the world.

There is not a single Middle Eastern country in that list. In fact, Sweden and Switzerland rank fourth and fifth respectively in the speed of internet connections.

To conclude, there is no such thing as a minimum number of operators for a market to be called one in a state of perfect competition as this is subject to the practices of market players. If anything, the telecommunications market in the UAE fits into a grey area between a full monopoly and a partial oligopoly.

Consider the following: when you decide to close your bank account, you will receive a couple of phone calls from the bank to inquire about the reasons behind your decision, etc. Also, they might go as far as offering you better refinancing rates just to ensure you stay with the bank besides delaying issuing the liability certificate to make sure they have enough time to talk you into staying with them.

Why? Because there are 51 commercial banks operating in the UAE. As far as I know, no one continues to operate in a given market if they are losing money in it.

I am not hinting that a higher number of competitors is always associated with a better service. But a semi-oligopolistic market can only be bettered by introducing an international operator to pave the way towards a healthy competition at first, and then perhaps a perfect one.

Moreover, doing so will ensure that current operators will compete in bringing back home top services charged at reasonable prices rather than competing in challenges. The last thought I want to leave you with: Why isn’t there an international roaming number as is the case with one telecommunications operator in France?