Riding the M&As wave in India’s telecommunications industry: The ambiguity of market concentration

By Francisco Beneke*

One can write either loud praise or a strong critique about the work of the Competition Commission of India (CCI) and the Competition Appellate Tribunal (Compat). However, it must be agreed that their influence on global affairs is growing at a fast pace. Now, the authorities must choose how to deal with a wave of consolidations in the world’s second largest mobile telecommunications market.

The industry was shaken up by the disrupting entry of Reliance Jio Infocomm, a company backed by India’s wealthiest man, Mukesh Ambani. It quickly captured an astonishing 100 million subscriber base in less than three months by basically giving all services for free for a limited period of time (ending in June this year). This was a hard blow to the industry, which had to enter into a profit-damaging price war, but fantastic news for consumers. In the aftermath, most of the main players have followed a consolidation strategy. In short, the deals may leave the mobile telecommunications market with three companies controlling at least 80 percent of subscribers and revenue.

Should these concentration figures raise concerns? A sensible answer is that the matter is complicated. Common thinking within antitrust authorities is that market concentration does not tell the entire story but that other factors, such as entry barriers, have to be examined. This, however, is not an interesting point because of two reasons: first, antitrust authorities tend to easily conclude the existence of barriers to entry in highly concentrated markets; and second, it is hard to find concentrated markets without some sort of entry impediment.

The more interesting question is how to interpret different market structures given certain industry characteristics. Under certain conditions, fewer firms can mean tougher competition. The reason is a commonly overlooked factor by antitrust authorities, which is the game being played in the industry. In other words, how firms adjust their behavior to that of their competitors. Here is where the work of John Sutton has made an invaluable contribution to our understanding of market structure.[1]

The game the author contemplates with the lowest concentration given a market size of a homogenous good is that of a cartel.[2] When firms collude to achieve the monopoly price, more firms can enter and share the market because of higher profits. When the game is more competitive—for example, with any form of uncoordinated behavior such as a Cournot or Bertrand setting—lower industry profits cause fewer competitors in equilibrium. In the most competitive game (Bertrand) the steady-state number of firms is one.

The bad news is that research on the determinants of the game in each market is still inconclusive.[3] As a practical matter, an antitrust authority like the CCI can conduct an investigation to obtain evidence on collusion and ensure that the strategies followed by market participants are at a minimum not the least competitive ones. But another important question still remains and is that of whether an increase in concentration will favor a game that leads to lower consumer welfare. An additional factor to consider in this matter is that of endogenous sunk costs, which can help understand how the existence of a few big players can actually be good news for consumers.

In markets like mobile telecommunications, firms usually choose how much they invest in the quality of their products (which in a broad sense includes advertising as well). That is, sunk costs are not exogenous. This is why, according to Sutton, we can see similar levels of concentration in the Indian market and that of my home country, El Salvador, even if the difference in size is abysmal. In such scenarios, Sutton’s model predicts that the biggest firms are expected to be the ones that offer the best quality and capture demand away from inferior products, which could mean greater concentration but is not necessarily detrimental to consumer welfare. The result will depend on how much value consumers place on superior quality.

We can easily imagine that preference for quality will be dictated in part by income. Here is where an important feature of the Indian market—and that of some developing countries—comes into play. India is an economy with rapidly rising incomes. If we can expect this trend to hold in the future, the mobile telecommunications market will be able to introduce better quality products for more demanding consumers. This could mean that the ideal market structure is one with a few firms with the resources to invest in the infrastructure needed (say, a 20 billion USD LTE network like the one deployed by Reliance Jio).

A final word of caution is in order. This article attempts only to shed light on factors that can be useful in understanding the consequences of the wave of consolidations in the telecommunications industry in India. However, a claim is not put forward that increased concentration is necessarily a good thing for consumers (it can lead to other overlooked problems already analyzed in this blog). Sutton’s theories rely on a set of assumptions that may or may not hold in this specific case. Their analysis can, nevertheless, help the CCI and the Compat to make a more educated guess (because merger control is nothing more than that) on the likely effects of the mergers that are currently taking place.

*Co-editor, Developing World Antitrust

[1] Sutton, J. (1991). Sunk Costs and Market Structure. Cambrige, MA: MIT Press; and Sutton, J. (1991). Technology and Market Structure. Cambrige, MA: MIT Press. For a discussion of Sutton’s work see Carlton, D.W., and Perloff, J.M. (2005). Modern Industrial Organization. USA: Pearson/Addison Wesley.

[2] With differentiated products, the theories predict only a lower bound of market concentration, but anything over it is possible.

[3] Carlton and Perloff (2005), supra, n. 1.

Tagged , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: