TERM PROJECT
Managerial Economics
The Indian Telecom Industry
Revolution and Transformation from a Monopolistic Market to Cartel Like
behaviour!
PRESENTTED BY
GROUP – 5B
Introduction
India is the most dynamic country for pursuing a wide range of businesses. India is regarded as the world's
second-largest telecommunications market. It is bifurcated into wireline, wireless, and internet service
providers. The telecommunications industry has evolved through many stages, from a monopolistic
structure providing essential telecom services via a landline to an industry fuelled by intense competition
from mobile services.
In this rapidly changing industry, the availability of SOTA technology, market diversity, access, and
innovations played a crucial role. The telecom industry is relevant to everyone and is vital to society.
Every primary sector in India, including healthcare, education, and travel, heavily relies on the
telecommunications industry and its services.
Telecom is one of the most crucial infrastructures for security. Every institution relies on telecom
services, from natural disaster relief to military requirements, to keep Indian citizens safe. It also
contributed to the transformation of the business world.
Every tech titan requires telecom services to function efficiently, from supply chain logistics to the IT
industry. Telecom penetration, also known as teledensity, has increased rapidly in recent years.
Teledensity increased from 18.23% in the fiscal year 2016 to 88.17% in the fiscal year 2021. Tele-density
was 85.91% in December 2021.
The Telecom industry is also attracting a lot of foreign investors. In January 2022, through the India
Digitization Fund, Google made a US $1 billion investment in Airtel. Similarly, other global vendors such
as Samsung, Cisco, Ciena, Jabil, Foxconn, Sanmina, and Flex have expressed interest in setting up
manufacturing in India for telecom and networking products under the recently announced PLI scheme.
Between April 2000 and March 2022, FDI inflows into the telecom sector totaled US$ 38.33 billion.
While operational challenges persist, telecom industry consolidation presents several opportunities for
surviving operators as prices return to cost-based levels.
The Impact
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7.2% – The Telecom industry is the second largest contributor to India in GDP
1.17 bn – The consumer base as of 2022. Expected to grow by 30% in the next 5 years
4 million – Employment generated by the Telecom Sector in India.
65% - The growth of the telecom sector in the past decade
The Reason
Given the impact that Telecom Industry created in India and owing to the ever-changing market
structure. We decided to dive deep, understand, and analyse the economic aspect behind the
development and how it will impact us in the future.
Since the Telecom sector is one of the major contributors to the GDP of India and the backbone of the
Indian economy and welfare, we have chosen the Telecom Industry.
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The Objective:
The government enjoyed a monopoly until the late 1990s by imposing laws that created barriers to
entry for private players, but soon after liberalization, the market changed significantly hence our aim
here is to look at how the market dynamics were since the 2000s and the players who played a key role
in shaping the market.
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Understand the Market – Historical evolution and development of the Indian Telecom Industry
during the transformation that India went through and analyse the continued importance of the
Telecom Industry for the economic prosperity of India.
Demand and Supply – Understand the Indian Telecom Industry, and various products available
and analyse the demand and supply patterns in the Telecom Industry.
Understand the Stages – Since liberalisation, the telecom market has gone through various
stages, we attempt to understand the dynamics of these market patterns – Like Monopoly,
Oligopoly, Monopolistic Competition, etc.
Economic Welfare and Market Leaders- Derive the consumer and producer surplus to
understand the overall welfare and compare amongst the key players.
Government Intervention - The Effect of intervention of the government in the telecom industry,
understand the pros and cons.
Impact of Covid-19 and the role of Telecom Sector in Industry – 4.0 revolution and try to predict
the future aspects based on our findings
Telecom Industry – The Evolution
The Indian telecom industry is more than 170 years old. The first operational landlines were installed by
the government near Kolkata in 1851, which marked the beginning of telecommunications in India.
Furthermore, in 1883, telephone services were brought together with the postal system.
In 1985, the Indian Telecom department was formed as part of the states. Later it was split into two
sectors, MTNL & BSNL. They acted as the natural MONOPOLY as there was no extra competition due to
the huge fixed and sunk costs in the investments
In 1994, National Telecom Policy gave way to the new technologies, but with the FDI still limited to 49%
and high regulations in only 8 operators were given rights to operation, this marked the inception of the
OLIGOPOLY market, which soon witnessed substantial growth over the decade.
In 1997, the Telecom Regulatory Authority of India (TRAI) was established with the aim to provide
recommendations for the introduction of new service providers and the terms and conditions of license.
TRAI is vested with judicial authority and powers.
In 1999, New Telecom Policy (NTP99) was formed, under which many restrictions were laid off and FDI
raised to 74%. New private Operators were given license. New private players entered the market and
unlimited competition was allowed.
During 2007-20014 many private companies were given license to operate mobile services throughout
the country. There were around 10 major private players operating in the OLIGOPOLY market, and soon
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Telecom policy (NTP2012) was incorporated which brought a new wave of broadband and internet
spread through the country
Telecom Industry – The Phases
➢ Phase-I : Pre-Liberalisation Era i.e. 1980-89
➢ Phase-II : Post Liberalisation Era i.e. 1990-99
➢ Phase-III : Post 2000s
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Few other salient policies implemented by the government National Digital communications policy (2018) – Designed to attract investments worth $100 bn and
increase the privacy and security of the consumers.
Relaxation of FDI to 100% - This helps more private companies to take funding from foreign institutions
and develop their product and compete in the market.
Indian Mobile Congress (2020) – Encourage R&D in the telecom sector.
The current government is taking various steps to increase liberalisation and promote healthy
competition by providing more autonomy to the private play while at the same time trying to maintain a
PSU to serve the poorer sector who cannot afford the increasing costs due to the privatisation of the
Telecom industry.
Telecom Industry – The Analysis
The extremely high fixed costs and high economies of scale, make it impractical and unprofitable for
more than a few key players to coexist in the Telecom Industry, these act as natural barriers of entry for
any new firm trying to enter the market. Already prevailing market leaders also create artificial barriers
to entry by using political support and reducing the prices, ultimately creating a leader-follower model
for small firms, thereby reducing their total economic profits to zero.
We are mainly concentrating on the post-2000s era, where maximum competition is witnessed, in the
current scenario the Indian consumer’s demand curve is highly elastic hence the suppliers are coming up
with competitive prices and incentives.
The Telecom market is an Oligopoly market in India. It is a market structure that lies between Monopoly
and Perfect competition. The market constitutes of a few large players and other small firms. The
market has barriers to entry due to high fixed capital required for market entry, therefore, increasing
the chance of acquisition of smaller players by the larger established ones. The equilibrium in the
market is attained at the point of MR = MC. The market share of major Telecom players in the year 2011
in India is given in the following pie chart. With over 7 companies occupying higher shares amongst the
private players.
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Disruption of Market – Enter Jio
The market structure has been completely disrupted by the entry of Reliance Jio, as of 2022 there are
only 3 key players left in the market. There has been a significant reduction in the number of
competitors post the entry of Jio. The HHI index in the year 2020 was around 2800 which shows that
there is a high market concentration as opposed to a value of 1600 in the year 2016. A few of the major
reasons are, that small firms exit the market in the long run after minimising their costs and the merger
between Vodafone and Idea two major players in the Telecom Industry.
According to recent research, economists are predicting that the telecom sector is heading toward a
Duopoly. Since, Vodafone is on the verge of bankruptcy and is currently unable to retrieve the variable
costs, according to our learnings it is evident that if a company is below the shutdown point where TR <
AVC then the company will exit the market.
Market Structure of Telecom Industry
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Demand and Supply
There is no direct way to measure the supply and demand since the Telecom Industry is dominantly a
service sector. Hence, we plan to analyse the change in the supply and demand in this industry by
considering the count of service providers and subscribers.
Based on the above-mentioned graphs we can infer that the demand is growing rapidly, and majority of
the demand is due to the urban sector and Jio has the most subscribers.
As mentioned before, many suppliers are exiting the market due to long-term losses caused by the
reduction in the equilibrium price of the service provided.
As depicted by the above-mentioned graphs, the decrease in price led to a decrease in the Average
Revenue (AR) and Marginal Revenue (MR), and increasing R&D and infra costs led to an increase in the
ATC and MC and the small firms weren’t able to achieve profit maximisation condition which is MR = MC
and had to exit the market thereby reducing the number of firms in the market and converting it to an
Oligopoly.
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Analysis of Market Structure
From the previously shown distribution of market share, it is evident that the Indian telecom industry is a
perfect example of an oligopoly structure. The characteristics are as follows:
➢ A Few Firms with Large Market Share: We know that in an oligopoly market structure, few firms
hold a considerable market share, and they present a huge challenge to any new entrant because
they can exercise power over the market. This is evident in Indian telecom industry, where players
like Reliance Jio, Bharti Airtel and Vodafone Idea hold together more than 50% of the market share.
➢ High Barriers to Entry: Firms in an oligopoly structure exercise their power and maintain their
position through several barriers of entry which makes difficulty for new entrants who are trying
to build their presence in the market and attract customers. The Indian telecom industry poses
barriers for new entry in terms of:
a) Taking approval from TRAI
b) Start-up costs are high
c) High licensing fees
d) Continuously evolving technology
e) Patent, Trademarks and Copyright barriers
➢ Interdependency of Firms: In an oligopolistic market, any action taken by a firm has strong
influence on the actions of its competitors. As a result, according to game theory, we have what is
known as the "Prisoners' Dilemma," which states that an oligopolistic firm would act in accordance
with how they anticipate competitors will respond. In the Indian telecom industry, the Cellular
Operators Association of India (COAI) acts as the main interface between the stakeholders of the
Indian telecom ecosystem.
➢ Homogeneity in Products: In an oligopolistic market, the firms' products are either homogeneous
in nature or differentiated. In the telecom industry, the firms' products are homogeneous in nature
since they are all catering to the same demand. The players like Reliance Jio, Bharti Airtel, and
Vodafone Idea offer the same 4G and fibre services to all consumers.
➢ Non – Price Competition: Oligopolists do not place much emphasis on price competition among
themselves. Instead, they experiment with alternative strategies like rewarding loyal customers,
diversifying their product offers, conducting sales promotion programs, being sponsors, etc. They
act strategically to avoid losing clients to potential price competition. In the Indian telecom
industry, non-price competition is on parameters such as
a) Network Coverage
b) Customer Service
c) Data Privacy
d) Celebrity Endorsement
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Performance of Key Players
The Key Players in the Telecom Sector are:
Before the introduction of Jio, the Indian Telecom players were situated in an Oligopoly market, soon
after Jio entered the market and reduced the data prices drastically, Jio was able to enjoy a monopolylike stage for a short period of time but soon the large firms came back by reducing their prices and soon
the market was exhibiting the behaviour of Oligopoly.
Our aim is to understand various strategies implemented by each firm to increase their market share
and profit and analyse the current market situation.
Breakeven Analysis:
The breakeven provides a specific way to study the inter-relationships between cost, volume, and profit.
Any business is said to break even at the point of sales volume when its Total Revenue (TR) is equal to
Total Cost (TC).
Breakeven point (BEP) = {Total Fixed Cost/ (Sales – Variable Cost)} X Sales
According to this analysis, Vodafone is unable to reach the breakeven point and hence it is currently
running in losses which is a negative implication.
Price Discrimination
Jio and other TSP’s implement several different pricing strategies to maximize revenue and profit. Some
of the important pricing strategies that grew popular after the entrance of Jio have been discussed
below.
Jio followed the tactic of Predatory Pricing to attract the consumer base, since India has a highly elastic
Demand curve, there was a significant shift of the consumers from their original TSPs to Reliance Jio.
Firms like Airtel tried to tackle this problem by providing discounts and hence were able to sustain the
blow dealt by Reliance Jio.
Soon, the firms adopted second-degree price discrimination to convert the consumer surplus into
profits. An example of second-degree price discrimination which has been adopted by Jio to charge
customers at a different rate based on the quantity purchased is mentioned below
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The Collusion of Jio and Airtel
Data prices in India have been at an all-time low. In a report by the TRAI, it was stated that “all TSPs were of the
view that due to competitive pressures, the telecom services are being offered with almost no margin, this will
have serious repercussions in the future as more firms will exit and this might lead to a monopoly. Jio and Airtel
have colluded and have fixed the price and earned profits by changing their quantity instead of competing with
their prices.
Conclusion
The Telecom sector has the potential to create a multiplier effect in the economy. The requirement for
high capital and the high economies of scale are often the barriers to entry for new players. The
government has kept this into consideration while making policies to boost infrastructure. There have
been huge foreign investments in the Telecom sector since 2020. But the pressing issue is the cartel that
has been formed by Jio and Airtel which is adding more barriers to entry ultimately not allowing new
players to enter the market, at the same time small firms are exiting the market due to long-term losses
because of a drastic decrease in the data charges.
The entry of Jio has led to an increase in short-run consumer welfare, but a decrease in long-run
consumer welfare. Before Jio’s entry into the telecom industry, due to the collusion between the old
firms, prices were extremely high and consumer welfare was low. Jio’s entry drastically increased
consumer welfare in the short run. In the short run, as a result of the predatory pricing strategy,
consumer welfare increased and has remained high as a result of continued low prices. Second-degree
price discrimination, third-degree price discrimination, and peak load pricing also give way to more
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allocatively efficient models, resulting in lower prices and more quantity sold, where both consumer and
producer benefit
The rise of Jio’s dominance in the market, due to its reputation, pricing strategies, and superior financial
backing, has increased. Furthermore, other large players, like Vodafone Idea are on the verge of shutting
down, and the market is likely to become a duopoly, or perhaps even a monopoly. If the telecom
industry becomes a monopoly, prices will rise substantially, and barriers to entry will also increase,
making it impossible for new firms to join the market in the future.
In any oligopolistic market it is the role of antitrust or regulatory agency to ensure collusion does not
take place. The overall aim of these agencies is to keep prices low, competition fair, and ensure that
consumer welfare is maximized. The TRAI, Telecom Regulatory Authority of India, follows the basic
principle of forbearance: not intervening in prices if they are low. Over the past few years Vodafone Idea
has made substantial losses and is on the verge of shutting down. Furthermore, they have unpaid AGR
(Adjusted Gross Revenue) dues of Rs. 60,000 crores to the government, which they are unable to pay.
The shutting down of a large firm such as Vodafone will have dire repercussions on the state of the
telecom industry: The industry will become a virtual duopoly, and prices will be bound to increase as
competition reduced and collusion becomes ever simpler. TRAI has not yet accepted the proposal of the
price floors discussed earlier. However, this leads us to believe that all TSPs are in the view of increasing
data prices. Without the price floors Vodafone may be forced to shut down, as it cannot maintain
output at the current price level and may increase prices in an attempt for survival. This is another
reason why price hikes can be expected in the future
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Collusion market
➢ Tacit collusion
➢ Rival firms joined together to exclude the new firm
➢ Vertical price fixing between mobile operators & retail
We believe that if this behavior continues then the market will soon shift towards a Duopoly.
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