COURSE: TELECOMMUNICATION
ECONOMICS
PROFESSOR: WUHONG
School of Economics and Management BUPT
Economics Research Center
(MING GUANG 504)
Tel:13621050170
Email: w_hong@263.net
Chapter 4 Communication Market
INDEX
 The Overview Of the Communication Market
 The Trend of the World Telecommunication
Market
 The Structure of the Telecommunication Market
 The Analysis of the Operation
 The Analysis of the Market Behavior
 The Evaluation of the Market performance
SECTION 1 The Overview Of the
Communication Market
 Communication Market
 The classification of communication market
 The character of the communication market
Communication Market
• Concept of the market
• Communication market
Service
Market
table 8-1 Communication Market
-ation market
Equipment
market
Post Market
– The communications sector now forms an important part of most
economies in the developed world. Communication market is a
important part of the social commercial market, which is one of
the sub-system in the whole market.
– The main body of the communication market
Communication
 The chief supplier
market
 The virtual telecommunication operator
 The chief demander
 The manager of the market
Telecommunic
Mobile virtual network operator
• Virtual operator
A service operator that does not directly or indirectly own the network it
uses, but it owns some critical network elements. A virtual operator is
liable for its products and services, pricing and customer service. The
company leases the mobile communication network from the network
provider, which is in responsible for the functioning of the network.
• Early
An MVNO is a company that sells mobile phone service by making use of
another company's existing network infrastructure. An MVNO will have its
own rates and calling plan features, its own billing system, and its own
customer service department. It is not, however, responsible for where cell
towers are placed and has no control over coverage issues in general. An
MVNO will typically pay its host carrier a greatly discounted rate for the
time that its users make use of the host's network, which allows it to make a
profit of its own as a reseller. The host network benefits by being able to
profit from otherwise unused network capacity without having to spend the
marketing and customer service dollars required to increase its own
subscriber base.
The classification of the communication market
• According to general sense and narrow sense
General: communication equipment market and communication
service market
Narrow: communication service market
• According to specialty
Post communication market and telecommunication market
According to geography area
International communication market and domestic communication
market
According to consumer
– Individual consumption market and group consumption market
– Real demand market and potential demand market
SECTION2 The Character of
the Communication Market
• High Relation
– The relationship of communication market and national
economic development
– The equilibrium of the whole industry chain
– The relation of communication market and the financial market
• Competition and cooperation
– Competition and cooperation between different network service
provider
– Competition and cooperation of different nodes in the whole
communication industry value chain
• Unbalance of development
Communication industry chain
Equipment
manufacture
basic network operation content application service
operation
service
provider service
integration
customer
channel
Telecommunication value chain
• Value chain
In order to understand that concept, let’s look at the basic
idea of a value chain. This concept was first put forward by
Michael Porter, who wrote about it in his book Competitive
Advantage: Creating and Sustaining Superior Performance
(1985). Simply stated, a value chain is the recognition that the
value of a product is not created out of nothing by a
manufacturer and delivered to the end user for a price.
Component vendors, distributors, retailers, and end users all
contribute value.
Telecommunication value chain
• Telecommunication value chain is jointly made up of network
equipment supplier , network operation, content service
provider, system integration, terminal unit producer, special
application development, software development , terminal
user and so on .
• The representational telecommunication value chain in
domestic such as monternet,chinavnet, unicomonline has been
improved.
• The telecom company locates in the core of the value chain
The development of
telecommunication value chain
• Generally speaking, the communication value chain is a value
increase chain of communication products
• The traditional value chain extends and the framework change
a lot
• The telecom service providers regard the value chain
management as an important tool improve the chain of the
telecommunication industry
• reason：competition improve the construction of value chain,
development of internet build the platform of value chain,
informationization drive value chain extending, cost optimize
cause the value chain.
The development of
telecommunication value chain
Section 2 Telecommunication development
trend
•
•
•
•
•
Opening competition
Transformation of property right
Globalization trend
Convergence trend
Complex consumer demand
Globalization trend
• Worldwide communications revenue totaled
approximately £840bn in 2005 (equating to around
£129 for each person on the planet), having grown at
an average annual nominal rate of 5.9% since 2001.
• Communication operator has the desire for a deep
understanding of the international arena ,which is
driven by the ongoing globalization of
communications services and business models
• More and more world operators have the growing
will to develop abroad.
Convergence trend
 Convergence is becoming a global phenomenon, but it is being
manifested at different paces and in many different ways. The UK
is at the vanguard of bundled services, with over one third of
households taking two or more communications services from one
provider. However, converged platform services like VoIP and
IPTV are taking off in countries like France, Italy and Japan at a
much faster rate than in the UK.
 There is evidence that increasing convergence of communications
services is beginning to have an impact on traditional media
consumption.
 Across the world, 18-24 year olds are leading the transition to
convergence. More and more broadband users download television
programmes and clips over the internet.
 With broadband becoming more widespread, the internet has
become an increasingly important source of advertising
expenditure
Convergence trend
Convergence is a widely-used and wide-ranging phrase, and
can take many forms:
 Device convergence allows consumers to access many different
services from the same device, even if they are delivered over different
platforms (an example might be a mobile phone with an integrated FM
radio).
 Billing convergence means that consumers can receive many different
services on the same bill and possibly deal with one customer support
centre; this type of convergence also allows operators to offer bundled
pricing of products, as a means to attract and retain multi-service
customers (for example a combined cable TV/fixed-line bundle).
Convergence trend
 Platform convergence is the most advanced – and fastest-growing –
form of convergence. It enables consumers to access multiple products
and services over a single platform, and often over one device, with a
single operator relationship. Examples of this include voice over
internet protocol (VoIP) telephony – both fixed and mobile –and TV
over mobile devices.
Complex consumer demand and behavior
The act of measuring and analysing consumer behaviour in the
communications market has become far more complex. New
sectors, products and services have sprung up; new operators
have become established in all major sectors; both tradBitional
and new services are being delivered to consumers over
multiple platforms.
Section 3 The Structure of the
Telecommunication Market and the
analysis of operation
• Market structure
• Main factor deciding the market structure
• The analysis of communication market structure
Market Structure
• Perfect competition Market
1. All firms sell an identical product.
2. All firms are price-takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices charged by each
firm.
5. The industry is characterized by freedom of entry and exit.
6. The industry concentration is low
Market Structure
Monopoly market
1.
There is only one firm which supply the entire market and many
buyers & consumers.
2.
The firm sells a unique product, which has no close substitutes.
3.
The firm has market power (that is it can control it's price)
4.
Entry into the market is restricted, e.g. due to high costs and some
special barriers to entry. A social, political or economic impediment,
that prevent firms from entering a market.
5.
The concentration radio is 100%
Market Structure
Oligopoly
1.There are only a few firms that make up an industry.
2.This select group of firms has control over the price and, like a
monopoly, an oligopoly has high barriers to entry.
3.The products that the oligopolistic firms produce are often nearly
identical and, therefore, the companies, which are competing for
market share, are interdependent as a result of market forces.
4. The concentration radio is high
Market Structure
Monopolistic Competition Market
1.There are many firms vying for control of one market.
2.Each firm offers a different type of product, as opposed to perfect
competition in which all offer the same product. Each firm, then, has a
monopoly in the market of their own product.
3.Thus, the firms try to advertise their products so people buy more of their
product. At the same time, monopolistic competitors do not try to
compete so as to undermine other competitors.
4.There are too many other businesses in a monopolistic competition to
worry about them, you simply try to get people to buy your own
product as opposed to respond to others' tactics.
Market Structure
Conclusion :
In reality, no such thing as a true perfectly competitive market exists.
There are other types of market structures, however: monopoly,
oligopoly, and monopolistic competition.
NOTE: What kind of market structure an industry is accounts
for how companies operate within it. Unregulated monopolies
with no government ties can generally do whatever they want.
After all, there's no one else to offer a different sort of service or a
different price. In oligopolies, there are few companies so if you
were a company and you made some sort of decision, it will
always be made to be a strategic tactic made to outmaneuvre your
rivals. In monopolistic competition, there are too many companies
and so you would just think about yourself and attract customers
because what you do will not affect anyone else.
The Measurement of Market Structure
• Concentration ratio (CR)
The concentration radio is the percentage of market share owned by the largest m
firms in an industry. ( m is a specified number of firms, often 4, but sometimes
a larger or smaller number)
The concentration ratio can be expressed as:
CRm = S1 ＋ S2 ＋ …＋Sm
m
全部
=∑ Xi／ ∑ i=1 Xi
Often use ： CR4 ，CR8，CR20，CR50…… Where Si= market share of the ith firm
i =1
Note: CR4 were close to 0, this value would indicate an extremely competitive
industry .if the CR4 measure is less than about 40( indicating that the four
largest firms own less than 40%of the market), then the industry is considered
to be very competitive. If the CR4 measure is more than about 90, that one firm
that controls more than 90% of the market is effectively a monopoly.
The Measurement of Market Structure
• m is the max number of firms, s is the market scale, S1  S2
 …Sm
Measurement ：absolute method
CRm concentration ratio
H index Herfindahl-Hirschman Index (HHI)
Entropy Index
Rossum-Bruce index
Measurement ：relative method
Lorenz Curve and Jini Coefficient (G)
Logarithm Variance of the Manufacturer scale
J.Bain’s market structure theory
Marketstructure|concentrate ratio
C4 value（％）C8 value（％）
OligopolyΙ
75≤C4≥
－
OligopolyⅡ
75< C4≤85
or 85≤C8
Oligopoly Ⅲ
50< C4≤85
75≤C8<85
Oligopoly Ⅳ
35≤C4<50
45≤C8<75
Oligopoly Ⅴ
30≤C4<35
Or 40≤C8<45
Competition market
C4<30
Or C8<40
UekusaEki’s market structure theory
Market structure
Industry scale（100million yen）
C8value（%）
Macro-sort
Micro-sort
Extremely high
（D）
Big scale
70<C8
Year
production>2
00
Year production<
200
40<C8<70
Year
production>2
00
Year production<
200
20<C8<40
Year
production>2
00
Year production<
200
C8<20
Year
production>2
00
Year production<
200
Oligopoly
high（G）
Competition
Low
concentratio
n（J1）
Dispersed
competition（J2）
Small scale
Herfindahl-Hirschman Index
• The Herfindahl-Hirschman Index provides a more complete
picture of industry concentration than does the
concentration ratio.
• The HHI uses the market shares of all the firms in the
industry, and these market shares are squared in the
calculation to place more weight on the larger firms.
• If there are n firms in the industry, the HHI can be expressed
as:
HHI= S1n2 ＋ S22 ＋ …＋Sn2
2
= ∑i =1（Si/T)
Where Si is the market share of the ith firm.
T is the market scale
Herfindahl-Hirschman Index
• NOTE:
The Herfindahl-Hirschman Index is calculated by taking the sum of the
squares of the market shares of every firm in the industry. For example, if
there were only one firm in the industry, that firm would have 100% market
share and the HHI would be equal to 10,000 -- the maximum possible
value of the Herfindahl-Hirschman Index. On the other extreme, if there
were a very large number of firms competing, each of which having nearly
zero market share, then the HHI would be close to zero, indicating nearly
perfect competition.
The characteristic of H index
• Giving more average weight to the big scale firm than the
small one.
• For example ：the market share of the two different firm is
respectively 0.3,0.3. H = （0.3）2 + （0.3）2 = 0.18
if unite the two firms into the one
H =（ 0.6 ）2 = 0.36
Limitation ：strict requirement to the data
Assuming that the two market scales in the whole industry scale
proportion of A or B firm is
The characteristic of H index
for example, Sa = Xa / T; Sb = Xb / T
If combined them into one, the result is ：
（ Sa + Sb ）2 – (Sa 2 + Sb 2)
= Sa 2 + 2 Sa Sb + Sb 2 – Sa 2 – Sb 2
=2 (Sa Sb > 0)
The relation of concentration
ratio and H index
• Referring to m defined firms, H index locates between
– Hmin =（CRm）2 and Hmax = {(CRm）2 CRm >1/m
m
So when CRm >1/m， Hmax － Hmin =m-1/m （CRm）
2
The comparison between concentration ratio
and Herfindahl-Hirschman Index
Market
scale（%）
S1
marketA
marketB
marketC
marketD
60
20
100/3
49
S2
10
20
100/3
49
S3
S4
5
20
100/3
0.25
S5
S6……S8
S9 S10
5
20
0
0.25
5
0
0
0.25
0
0
0
0.25
CR4
80
80
100
98.5
H
3850
2000
3333
4802
n
EI   Si log(1/ Si )
i 1
Entropy Index
• Entropy Index, borrowing the concept of information theory,
having the signification of entropy, which can be expressed
as ：
• Si is the market share of the ith firm
• n is the firms in the industry
Rossum-Bruce index (R index)
• R index can be expressed as:
n
RI  1/(2 i  Si  1)
i 1
-i is the sequence of the firm in the market
-Si is the market share of the ith firm.
-n is the total number of the firm in the industry
• Relative measure index
Concentration curve
%
A
accumulative total
B
C
firm number（from big to small)
Lorenz Curve and and Jini Coefficient (G)
Jini coefficient = the area of Lorenz Curve and diagonal=A /（A+B）
When Jini coefficient = 0？
When Jini coefficient = 1？
Think about The limitation of Jini coefficient?
(The situations of 100 firms (proportion is 1%) and 2 firms (proportion
is 50%))
The calculation of Jini coefficient
1. direct calculation
△is Jini Average of Absolute Difference(Jini AD) ,∣Yj－Yi∣is the absolute value of an
couple of Income Sample variance . n is sample capability. U is the average income.
is defined as:
We can prove that：G=△/2u＝2SA，from G= SA/ SA+B，SA+B=1/2，G=2SA,we can
define the G is the Jini coefficient. From the two formula, we get the calculation of
Jini coefficient:
The calculation of Jini coefficient
• 2 curve fitting method
Assuming the function of Lorenz Curve is the power
function I=αPβ .According to the Choosed sample data, we
get the Lorenz Curve using regression. For example, α＝
m,β=n.quadrature
Calculate :
The calculation of Jini coefficient
• 3 grouping calculation
Assuming there are n groups, income of each group is Yi，so the
area of each part P is:：
The calculation of Jini coefficient
to sum up：
When the number n is limited ,we define：
the approximate expression is :
The calculation of Jini coefficient
• 4 decomposition method
G = k∑WiGi+Ib+ε（fi）
Logarithm Variance of the
Manufacturer scale
• V = 1/N ∑(logSi) 2 - 1/N (∑logSi )2
The calculation of the concentration ratio
• E.g, the service income market
share in the industry are
separately :
• Calculating CR4、and H index
• If the 1-4th market shares have
changed into50％，40％，6％，
2.6%,what is the new result？
China mobile
37.4％
China telecom
32.5%
China netcom
16.6%
China unioncom
12.1%
China tietong
1.2%
China weitong
0.2%
The H index of Each service in Domestic
telecommunication market
• Fixed-phone
• Mobile phone
• Data service
The market structure of telecommunication
(according to the year)
The market structure of Chinese telecom
industry （2002，different project）
THAT’S ALL!
THANK YOU!!