Intermediate Microeconomics II

ECON 2111
Semester 1 2018/2019

Mobile Network Operators

Prepared by
Nur Aliaa Binti Zulkifli
1625784

Prepared for
Dr. Intan Zanariah Zakaria
1.0 INTRODUCTION

As one of the developing countries, Malaysia keep advancing economically

and socially including in telecommunication sectors. To keep up with the

globalization, having smartphones is essential. Because of this, we can see that the

number of smartphones users increase every year. According to the survey by the

Malaysia Communication and Multimedia Commission (MCMC) in 2017, the

number of smartphones user increased to 75.9% compared to 2016 which is 68.7%.1

It also stated that 68.3% of the users have been using smartphones for more than 2

years. Encouraged by the increase in the number of users, in order to attract more

customers, the mobile phone service providers in Malaysia become more

competitive in offering more innovative package and plan even though our mobile

services operators market is almost saturated. However, the number of mobile

service subscribers had decline to 42.34 million in 2017 from 43.47 million in 20162.

To answer the irony of this situations, we will study the type of market for mobile

phone service providers in Malaysia and determine its market structure.

1
MCMC (2017). The Malaysia Communication and Multimedia Commission Hand Phone Users Survey 2017.
Kuala Lumpur: MCMC.
2
MCMC (2018). The Malaysia Communication and Multimedia Commission Industry Performance Report
2017. Selangor: MCMC

1
2.0 MARKET STRUCTURE OF MOBILE PHONE SERVICE

PROVIDERS

Generally, market structure can be defined as a classification system for the

key traits of a market, including the number of firms, the similarity of the products

they sell, and the ease of entry into and exit from the market. 3 Basically, there are

four basic market structure in an economy which are known as Monopoly,

Monopolistic Competition, Perfect Competition and Oligopoly.

To determine a market structure of an industry, there are a few elements we

need to observe. Firstly we can observe the number of buyer and seller in that

industry. Then, we should observe the entry conditions of that industry, the market

power of each firms and their degree of competition. Apart from that, we can also

look at the nature of the commodity. Lastly, we can check their pricing strategy.

2.1 NUMBER OF BUYER AND SELLER

As mentioned before, the mobile phone service operators market in Malaysia

is almost saturated. Saturated market means that the market has little or no chance

to increase sales since all their prospective customer has the product or substitutes

3
Nur Huda, A. W., Jamaliah, M. K., Geetha, S., & Sabariah, Y. (2010). Economics theory in the Malaysian
context. Singapore: Cencage.

2
that is almost a perfect substitute.4 The number of buyer in mobile phone services

providers can be observed by looking at the number of mobile cellular subscriptions.

Based on the Report of Industry Performance by MCMC, Malaysia has 42.34 million

mobile service subscribers in 2017. This figure is rather quite high. However it is

reported that the number of the subscribers has been decreasing since 20155.

Even though we have millions of subscribers, the number of seller of the

mobile phone service providers or mobile network operator (MNO) are limited.

Basically, Malaysia mobile network operators market has four major players which

are Celcom Axiata, U Mobile, Maxis and Digi.6

2.2 ENTRY BARRIERS, MARKET POWER AND DEGREE OF

COMPETITIONS

Barrier to entry is a situation that prevent entry by a new competitors into an

industry7. Malaysia telecommunication industry has a high level barrier of entry.

Through the introduction of various policies initiatives by the Malaysian government

such as provision of licence for new firms and general regulatory pricing principles8,

it is slightly difficult for a new firm to enter this industry. Apart from that, the major

players in the industry such as Celcom, Maxis and Digi already achieved economies

4
What is SATURATED MARKET? Definition of SATURATED MARKET (Black's Law Dictionary). (2013,
March 02). Retrieved November 16, 2018, from [Link]
5
Refer Appendix 1
6
Refer appendix 2.
7
Pindyck, R. S., & Rubinfeld, D. L. (2015). Microeconomics (8th ed.). Harlow, England: Pearson.
8
MCMC (2018). Malaysia Communication and Multimedia Commission Public Inquiry Paper Review of
Access Pricing (2017). Selangor: MCMC.

3
of scales and build their reputation for years. So when a new firm enter the industry,

they will encounter a higher cost in promotion to attract customers. For an example,

in 2007, U Mobile enter this industry and to attract customers, they need to offer a

package that is promising and spent a lot of money in promoting their company and

building their reputation.

Market power is the capability of a buyer and seller to influence the price of

a product9. In economics, a firm market power and degree of competition can be

determined using a few ways. The most popular methods are Lerner Index, the

Herfindahl Hirschman Index (HHI), the Bresnahan-Lau Model, and the Panzar-

Rosse of H-statistic Index. In this assignment, we will use Herfindahl Hirschman

Index (HHI) to study the market power.

The Herfindahl Hirschman Index (HHI) or Herfindahl index is an index or a

tool of measurement to calculate the sum of the squared percentage in term of the

market shares of the firms within the industry10. The equation form of HHI is:
𝑁

HHI = ∑ Si2 (1)

Where si is the market share of firm i in the market, and N is the number of firms.

9
Pindyck, R. S., & Rubinfeld, D. L. (2015). Microeconomics (8th ed.). Harlow, England: Pearson
10
Herfindahl index. (2018, April 04). Retrieved November 21, 2018, from
[Link]

4
 So, in this industry where we have four major firms and small firms combined

into 1 category that have 27%, 26%, 22%, 14% and 11% market share respectively11.

The Herfindahl index equals 0.272 + 0.262 + 0.222 + 0.142 + 0.112 = 0.2206 (22.06%)

Based on the HHI, if the market share is 100%, it refers to monopolist firm.

On the other hand, if the index near with zero, it refers to pure competitive market.

Therefore, we can conclude that, the higher the HHI, the higher will be the market

concentration. Based on the calculation, the mobile phone service providers market

is moderately concentrated.

2.3 NATURE OF COMMODITY

The service offered by the telecommunication company is a standardized

service and their product is can be highly substitute by others company. Basically

their product is homogenous. Because of this, to survive in the industry, they need

to differentiate their product. For example, for mobile service with monthly payment

of RM98, both Maxis and Celcom offer unlimited calls, but only Maxis offer

unlimited SMS with the same plan. Also, with the same price Celcom customer can

enjoy 20GB data quota while Maxis customer only get 15GB data quota. Someone

who use more SMS will choose Maxis and someone who use more data is more

likely to choose Celcom plan.12

11
Refer appendix 3
12
Refer appendix 4

5
2.4 PRICING STRATEGY

Since the industry have a large number of subscribers and a few firms to cater

the demand, each firm in the telecommunication company could be a price maker.

However, the price competitions are high because their product are homogenous.

So most of the time these telecommunication companies are in price war which leads

to less revenue. In order to maintain their position in the market, and maximize their

profit, they would have to consider the possible reaction of the competitors to their

own pricing, output and advertising decisions13. To ensure they are minimizing cost

and maximizing their profit, they use price discrimination. Price discrimination is a

practice where the firm charge different price to different customer for the same

product. 14

In Malaysia, these telecommunication companies such as Celcom, Maxis, U

Mobile and Digi priced their products using a two-part tariff. A two-part tariff is a

form of pricing where consumer are charged an entry fee and a usage fee15. They

charge a monthly fee for their plan which usually include free calls, free basic data,

and a little hi-speed data. When their quota is used up, the customer will be charged

a different price for additional usage. These firms are able to use this type of pricing

because each customer has different demand and needs.

13
McConnell, C., Bure, S., Flynn, S. and Grant, R. 2012. Economics. Global ed. New York: The McGRaw-Hil
companies, Inc.
14
Pindyck, R. S., & Rubinfeld, D. L. (2015). Microeconomics (8th ed.). Harlow, England: Pearson
15
Ibid

6
 Maxis Celcom Digi U Mobile
One Plan Gold / Gold +/ Postpaid P48/78 &
98/128/158 Gold Supreme 80/90/110 Unlimited P99
Monthly
Commitment 98/128/158 80/98/128 80/90/110 48/78/99
(RM)
Hi-Speed
Data Quota 15/40/50 10/20/25 10/15/25 5/15/Unlimited
(GB)
 Music
Weekend –
Weekend streaming –
10/20/25 GB
Free Data (4G) – 15 GB Weekend 4G – unlimited
Video WallaTM –
(GB) for One Plan
30/100GB (free 12
10/15/25  Video
98 streaming –
months)
5/7/Unlimited
Call rate Included Included Included Included
10sen/SMS (after
300 free SMS
20sen/SMS (to all
SMS rate Included used up) 10sen/SMS
networks)
Postpaid 110 –
1000 free SMS
2GB - RM20
Additional 1GB – RM6
5GB - RM45 RM 10 – 3GB RM 10 – 1.5GB
Data Rate 3GB – RM12
10GB - RM80
Contract
period No contract 12 months No Contract No Contract
(month)
Penalties
- RM300 - -
(RM)
 Free
Yonder
Music
 AnydayGB  Unlimited
OnePlan 98 – – 99 - Free
RM10/mon Postpaid 80/110
upgradable to data
th to – upgradeable to
Remarks / 30GB all-day roaming of
combine All-day Internet
Others data for 3GB in 12
weekend + Extra 10GB
RM10/mont countries.
and for RM10/month
h  30GB limit
weekday
for hotspot
data (free
with 12
month
contract)
Table 1.0

*Data from various mobile phone service providers’ website

7
 Table 1.0 shows mobile service rate plans as at November 2018 offered by

Maxis, Celco, Digi and U Mobile. All of these plans give customers an option of

alternative two-part tariff and the product offered similarly structured. U Mobile

offer 3 different plans. The least costly is P48 where we can just pay RM48 monthly

and enjoy 5GB hi-speed data, unlimited calls, unlimited music and 5GB video

streaming. If this plan does not cover our need, we can upgrade to more expensive

plan which is P78 and Unlimited P99 that suit our need, socially and financially. A

customer who want to use SMS service will be charged 10 cent per SMS. Apart from

that, if we have used up all our data quota, we can purchase additional data which is

RM 10 for 1.5GB. The company combined together the third degree price

discrimination which is by separating customer into different group and different

demand for each group with two-part tariff when they are proposing more than one

plan to the customer. Based on their demand, customer will sort themselves into

group and each group will applied different two-part tariff.

3.0 CONCLUSION

After observing all of the elements above, it can be concluded that the market

structure of mobile phone service providers fall into the category of oligopoly.

8
4.0 REFERENCES

1.0 MCMC (2017). The Malaysia Communication and Multimedia Commission

Hand Phone Users Survey 2017. Kuala Lumpur: MCMC.

2.0 MCMC (2018). The Malaysia Communication and Multimedia Commission

Industry Performance Report 2017. Selangor: MCMC.

3.0 Nur Huda, A. W., Jamaliah, M. K., Geetha, S., & Sabariah, Y. (2010).

Economics theory in the Malaysian context. Singapore: Cencage.

4.0 What is SATURATED MARKET? Definition of SATURATED MARKET

(Black's Law Dictionary). (2013, March 02). Retrieved November 16, 2018,

from [Link]

5.0 Pindyck, R. S., & Rubinfeld, D. L. (2015). Microeconomics (8th ed.). Harlow,

England: Pearson.

6.0 MCMC (2018). Malaysia Communication and Multimedia Commission

Public Inquiry Paper Review of Access Pricing 2017. Selangor: MCMC.

7.0 Herfindahl index. (2018, April 04). Retrieved November 21, 2018, from

[Link]

8.0 McConnell, C., Bure, S., Flynn, S. and Grant, R. 2012. Economics. Global

ed. New York: The McGRaw-Hil companies, Inc

9.0 MCMC (2017). Malaysia Communication and Multimedia Commission

Annual Report 2016. Selangor: MCMC.

10.0 Kim, T. W. (2018). Malaysia Industry Focus Malaysia Telecom (Rep.).

Kuala Lumpur: AllianceDBS Research.

9
11.0 Rahman, S., Haque, A., & Ahmad, M. I. S. (2010). Exploring

influencing factors for the selection of mobile phone service providers: A

structural equational modeling (SEM) approach on Malaysian consumers.

African Journal of Business Management, 4(13), 2885-2898.

10
5.0 APPENDIX

Appendix 1: Mobile Cellular Subscriptions and Penetration Rate 2015 - 2017

Appendix 2: List of Mobile Phones Service Providers in Malaysia 2017

11
Appendix 3: Mobile Phone Service Providers Market Share 2008 - 2017

Appendix 4: Postpaid Plans by Mobile Operators in Malaysia

12