Oligopoly In Telecommunications Industry, Internet Service Providers

Industry: Telecommunications Industry, Internet Service ProvidersNote: Since the telecommunications industry includes telephone companies, internet service providers (ISP) and mobile communications, I narrowed it to only ISP for better explanation and classification.

Before start to analyze telecommunications industry under 7 assumption, I want to explain what ISP is and why I chose it. An Internet Service Provider (ISP) is a company such as AT&T, Verizon, Comcast, or BrightHouse that provides Internet access to companies, families, and even mobile users. ISPs use fiber-optics, satellite, copper wire, and other forms to provide Internet access to its customers (Raymond Blockmon, n. d.). In Turkey, we had only Türk Telekom (TT) for ISP until 2004. The industry was a monopoly because of government regulations. Sadly, even after 2004, there wasn’t any other company to compete TT for a few years because Turkey had one internet infrastructure (all the cables and satellite systems) and it belonged to TT again. TT tried to hold a monopoly by overcharging other providers. Today, we have different providers such as Vodafone, Turkcell or UyduNet. I chose that sector because we can clearly see how industry structure changed over the years and how it affected the customer, companies and the service itself.

Number of Sellers:

As I mentioned before, the industry was a monopoly held by Türk Telekom. Although we have many companies today, there are few dominant firms operating in and those firms are competing against each other. Turkcell, Vodafone, and Türk Telekom have the market share of %80 and market revenue of %82 according to BTK (BTK, n. d.). Those firms are interdepend on each other and reacts to others change in prices, advertisements or output. This means the market is not the only criteria for prices, but also competitors are.

Additionally, entry and exit barriers are high. ISP is very technology-centric sector and it needs huge investments, expensive license/patents, and it must deal with the government regulations. Those considerations discourage the new entries and make it easier to have control over the market for ongoing firms.

Number of Buyers & Strategic Variable:

There are millions of households, work centers, and organizations that use the internet for different purposes and they don’t have any other realistic alternatives for the internet. The Internet is a homogenous product and companies can’t change the service itself. But companies can obtain more customers by offering services like better connection, more data allowance or faster download-upload rates. Also, they have a chance to serve big firms by offering server renting, internet security or exclusive cloud opportunities. Other than those promotion efforts, companies can change the prices, but this may lead to a price war. I will explain this later.

Cost Conditions:

Because the telecom sector is technology oriented, entry costs are massive, maintaining the service is hard and government regulations are changing perpetually. Internet infrastructure requires huge investments and set-up costs. Also, firms must work with skilled personnel, international organizations, and governmental agencies. Addition to all these costs, in order to compete in the market, firms should go for mass advertising since buyers could easily get distracted by its competitors’ price changes or service offerings.

Demand Conditions:

There are no logical substitutes for internet service. The Internet gives the fastest information, with hundreds of sources and with rich content. Other services cannot offer those features altogether. More than work and research purposes, the internet provides various entertainment choices. Nowadays, usage of YouTube decreased to the toddlers. Millions of buyers prefer streaming platforms like Netflix, BluTv over Tv channels. Instead of calling or SMSing, people tend to use WhatsApp, Facebook Messenger or Skype. Social media such as Twitter, Instagram or Snapchat changed how society thinks, feels, and acts. In this perspective, the internet is not a luxury but a necessity. As a result, anyone can say that demand for the internet will be much more in next years.

Objective Function:

ISPs main goal is increasing their profit in short-run, like any other profit organization aims. To do that, firms try different strategies like increase sales, build brand awareness, grow market share, target new customers and more. 1 January 2019 was a new beginning for Turkey because AKK (Adil kullanım kotası) is now forbidden and companies are trying to gain customers as releasing new internet plans for newcomers. Turk Telekom charges 24Mbps for 100₺1, Vodafone charges 24Mbps for 75₺2 and Turkcell charges 25Mbps for 90₺3. AKK regulation and new plans will cause a change in market shares and firms will try to win new customers or lose as little as possible. This is their primary short-run goals for profit maximizing.

Expectation of rivals’ reactions:

In this industry, we can clearly see that providers set their prices according to market and other competitors. They offer similar services for close prices. The reason behind it is, as kinked demand curve4 suggests, lowering the prices will not be beneficial for the firms because other competitors will quickly follow the price cut in order to maintain their market share. Increasing the prices will not work either since now the consumers can buy the substitute product from the competitors at a lower price. This is why ISPs like Vodafone, Turkcell or TT offer the same service for close prices. They all know that aggressive behaving will lower the revenue for them.

Conclusion:

Telecommunication industry (Internet Service Provider) in Turkey is an example of an oligopoly. The market is characterized by a few big sellers and market has a large number of buyers. Also, entering barriers are high and it discourages new firms to join the market. Products are homogenous, but firms are trying to differentiate by promotions or trademarks. Firms are is likely to be aware of the actions of the rivals. Not just aware but react to their strategies as well. The Internet has got no real substitutes, but firms are so identical that they can replace each other. Different industries such as mobile phone, computer/software, mass media or banking collaborate with the telecommunication industry, which generates more demand for internet access. All things considered, ISP industry in Turkey is oligopoly.