Singtel, Mobile One and Starhub are the only 3 companies providing mobile phone services in Singapore today. Explain why firms find it difficult to enter such an industry. [10 marks]

Chapter: Imperfect Market Structure

In the Singapore telecommunications industry, it can be identified as an oligopolisic market structure due to the characteristics, like strong barriers to entry and the large market concentration ratio of the few firms. Learn more about the types of barriers to entry, namely artificial and natural barriers.

   07 August 2018

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Mobile phone service providers operate within an Oligopolistic structure. They are considered oligopolies as there are only 3 firms for the whole market (few dominant firms), very difficult for new firms to enter the industry (high barriers to entry), able to set their own prices for the services they provide (market power) and more importantly, they will normally take into account the actions and reactions of their rival's actions when making their own decision (Mutual interdependence of firms).

Firms find it difficult to break into the industry (or any oligopolistic industry) due to the relatively strong barriers of entry that are present. These barriers for the mobile phone service industry includes legal barriers and financial barriers.

Legal barriers is the most significant barrier in the context of this industry as the government has to assess the firms who are interested in entering this industry before they are granted a licence. Although there is supposed to be totally free competition in this sector, IDA (Info- communications Development Authority of Singapore) is aware that there is a risk that long term benefits of liberalisation may not be fully realisable if competition is introduced too rapidly thus the number of licences granted is limited.

Also, there are financial barriers to entry. Such business requires a substantial capital outlay (expensive capital equipment and large network of service outlets) and the total returns may not cover the total costs, even in the long run, as the market size is .quite fixed and might be unable to support more firms. Furthermore, the incumbent firms enjoy a sizeable market share that allows them to reap large economies of scale (cheaper average administrative cost for each outlet and ability to buy mobile phones in bulk from the suppliers) and this means that new firm will end up making subnormal profits (their unit production cost will be much higher) if they want to effectively compete in the industry. Thus, unless the new firms have deep pockets and are willing to sustain losses in the short run without guarantees that it will be profitable eventually, it is unlikely new firms will try to enter the market as firms would be unwilling or unable to raise enough funds for such an investment.

Third, there is possible predatory pricing by incumbent firms in the oligopolistic market. Considering that the service provided (mobile phone subscriptions and SMS) is close to being homogeneous, the pricing will be a significant factor when consumers decide where to shop. It is thus likely that the existing firms would lower its prices, even below costs in the short run (they are able to because they would have sufficient funds from past supernormal profits), to compete with any new firms and force it out of business (Virgin Mobile in the past). This will deter new firms from entering the market.

Fourth, there may be barriers due to product recognition by dominant firms in the market. consumers are more familiar with existing brands and are unwilling to try out new firms due to the lack of a track record (information). Huge advertising costs might have to be incurred to create awareness and convince customers but it may not always succeed. For example, it took time for people to switch over to Starhub when it first launched its services as many were sceptical about its quality.

Lastly, there are after-sales services. After-sales services are very crucial for this industry and new firms may not be able to provide extensive and reliable infrastructure and network to attract consumers to switch over. New firms might also face difficulties in acquiring strategic resources such as trained staff or available space to set up their branches resulting in much higher cost of production.

In conclusion, firms are hindered by the above-mentioned barriers to entry. It is important to consider the use of different market strategies in order to achieve market penetration and occupy a substantial market share in this mobile phone industry.