Easing Barriers to Entry in Telecommunications

Question

The Singapore government granted more operating licences to increase competition in the telecommunications industry, comprising three players — Singtel, StarHub and M1. Since then, TPG Telecom and several mobile virtual network operators such as Circles.Life have entered the industry, leading to falling prices of mobile plans.

Discuss the potential benefits and costs likely experienced by consumers, firms and government due to the easing of barriers to entry in the telecommunications industry. [15]

Answer

Thesis. Easing barriers to entry lets more firms enter and compete with incumbents. As entry raises the number of firms, the demand facing each falls and becomes more price-elastic — there are now more substitutes. This essay weighs the benefits and costs of that change across consumers, firms and government, and argues that the net effect is favourable but conditional on entry actually materialising.

Consumers — chiefly benefits. Greater competition lowers the price each firm charges at its profit-maximising output, so consumers pay less and gain consumer surplus. With more firms, consumers also enjoy greater choice. And as firms compete, they have a sharper incentive to undertake R&D to make their products less substitutable, so consumers benefit from higher-quality goods and services. The costs to consumers are limited and indirect — they arise only if easing entry ultimately raises costs in ways that feed back into price, discussed below.

Firms — a mix of costs and benefits. Incumbents bear a clear cost: as competition rises, the demand for each firm’s service falls, and with more substitutes available each firm loses part of its market share and so part of its profit. There are also offsetting benefits. The pressure of competition can make incumbents less X-inefficient: to defend their supernormal profits they cut wasteful spending and produce closer to the lowest point of their long-run average cost curve, raising productive efficiency and lowering cost of production. Against this, with output now split across more firms, each reaps fewer internal economies of scale, which raises marginal and average cost — a countervailing force on the cost side.

Government — chiefly benefits. From the government’s standpoint, easing entry improves allocative efficiency. As each firm’s market power and price-setting ability fall, the gap between the socially optimum output and the actual output narrows, so the deadweight welfare loss shrinks and allocative inefficiency falls — advancing the government’s objective of maximising societal welfare. The cost to the government is the loss of scale economies just noted: if each firm operates below minimum efficient scale, the industry’s average cost of production rises, which can blunt some of the price benefit.

Evaluation and judgement. On balance, easing barriers to entry benefits consumers and the government, while imposing a net cost on incumbent firms — the usual distributional pattern of pro-competitive policy. But two qualifications temper the verdict, both turning on whether entry actually occurs. First, telecommunications requires large capital investment to enter; granting licences alone may not be enough to draw firms in, so the competitive benefits may not materialise. Second, incumbents can use their financial reserves and accumulated supernormal profits to engage in predatory pricing, pricing below cost to deter entry or to drive out nascent rivals before they establish themselves. The reasoned judgement is therefore that easing barriers to entry is, on net, beneficial — chiefly to consumers and government — but its realised benefits are conditional on entry succeeding, which licensing alone does not guarantee and which incumbents may actively frustrate.