Market Structure and Concentration in Australia’s Telecommunication Industry
The main purpose of this research work is to get an insight on the operational dynamics of Telstra. Telstra is a leading firm of Australia which belongs to the telecommunications industry (Baskarada and Koronios 2018). The main reasons behind selecting this firm are that its presence in the Australian economy is vast and moreover it has spread in the international markets which makes it a more preferable entity to construct market research. As per the data collected, for the year 2021, Telstra acquired revenue worth of AUD 21.558 million (Statista 2022). Thus, a healthy amount of revenue for the Australian economy gets accumulated from Telstra. The upcoming segments will focus on the market structure and concentration of the domain Telstra operates on and along with it another flow of research will be constructed on how technological advancements have altered the functioning of the said market domain.
As mentioned above, Telstra belongs to the telecommunication industry and the services it provides are fixed line and mobile telephony, internet, data services, network services and pay television services. Now, the market structure of the telecommunication industry is known to be oligopolistic (Castelnovo et al. 2019). In order to understand the oligopolistic market some background information are necessary about the different type of market structures as per market competition. Primarily there are two kinds of competition, perfect and imperfect. In perfect competition, there are infinite numbers of sellers and buyers who sell homogeneous products and there is no restriction in entering to and exiting from the market. Now, under the imperfect competition there are three sub segments, monopoly, oligopoly and monopolistic, as telecommunication industry is oligopolistic this paper will focus on that particular structure only.
In oligopolistic competition, the buyer base is large but the seller base is small; in fact, countably few firms operate in an oligopolistic market (Dean et al. 2020). Similar to that the telecommunication industry of Australia is also an oligopoly and there are a few firms like Telstra, Vodafone, Optus and others who hold large number of market shares.
The most distinctive feature of an oligopolistic competition is that as the firms sell similar kind of products. In Australian telecommunication oligopoly, the companies sell services related to network operations.
In an oligopoly market usually, there is a high barrier of entry and new entrants face several challenges. Similarly, the Australian telecommunication industry also poses high b barrier for new entrants.
In Australian telecommunication industry there are three major players, namely, Telstra, Optus and TPG. Previously, TPG was known as Vodaphone Hutchinson Australia (VHA). The total market size of the said industry was calculated to bed $35 billion worth in the first quarter of 2022. From 2021, this industry had attained a growth of 0.6% (Ibisworld 2022). As the households and number of businesses in the Australian economy is rising, the market is also attaining higher level of growth. The main reason behind labelling the telecommunication industry as an oligopoly market is the market concentration of the large firms. Dara had showed that in 2021 Telstra had 44% of the market shares under their wing. The close second was Optus with a share size of 31% and the last one was TPG with 17% share hold. The rest 8% shares were owned by the summed up other firms (Statista 2022). Using the Herfindahl Index, the competitiveness can be determined.
Competitors of Telstra in the Australian Telecom Market
According to this index, the vales can vary between zero to ten thousand (Naldi and Flamini 2018). The higher, the index value, the higher the competition. In the case of Australian telecommunication, the Herfindahl Index is,
HI = (44)2 + (31)2 + (17)2 + (8)2 = 3250
This identifies that, the market concentration is greater and the competition is also heightened which is the basic criteria for an oligopoly market. As a result, entry for new firms will be severely difficult in the Australian telecom industry where Telstra operates.
(Statista 2022)
Although Telstra operates on a global dimension, this research work has mostly focused on the domestic border of Australia. Hence, as described above, the biggest competitors of Telstra are Optus and Vodafone (TPG) (Taylor and Cervera-Jackson 2020). However, trends for the past 5 years had shown that the main competition takes place between Telstra and Optus and then the market acts as a duopoly which is a sub category of oligopoly but with two operating firms (Chen and Chen 2021). It has argued before that Telstra is the main dominating firm in the Australian oligopoly. However, when the other oligopoly players like Optus and Vodafone in order to expand their market shares started to decrease their service prices, Telstra witnessed a volatility looming over its market shares. Still, the CEO of Telstra argued that their consumer base will understand the prices they were paying for the premium services were well justified. Yet, when the prices of the competitors were lowered further, the loss of subscribers became more of a reality. During the period 2016-17, the company lost several amounts of revenue due to its rigidity on price structure (Corbin 2019). Hence, following the kinked demand curve theory ultimately Telstra was forced to lower their prices. Furthermore, during the same period there was an increased traffic on wireless networks and media businesses. Hence, the loss in revenue was filled up with inflow of more consumers.
In the following diagram, the kinked demand curve of the oligopolistic market is shown. According to this graph, price increase and decrease of the firms might be inelastic or elastic. However, the demand elasticity is consistent. According to this framework the operating companies have their demand curve with a kink at initial price levels. When price changes the elasticity changes and when the price decrease, the firms response at a higher intensity than that of price increase and in Telstra’s case when the price decreased on the part of other firms, Telstra was also had to decrease their prices.
(Dale 2016)
In the study of economics, it is always argued that constant upgradation is necessary for the growth and development of markets as well as the whole economies. There are three driving forces of economic growth, namely, productivity, capital and labour. In this era of digitalisation, technological advancements are coming forward to work as catalysts all over the world. Australia, where Telstra’s home base resides, is a technologically advanced country. Needless to say, any large operational firm in this country will also get the window of opportunity to utilise technological upgrades in their functional areas to become more efficient and to intensify their growth. Thus, this section will consider growth as the market condition change due to technological advancements.
Kinked Demand Curve and Telstra’s Response
Telstra has adopted several innovative measures which changed the market in attainment of better growth and heightened competition. Firstly, Telstra created an infrastructure business unit named ‘InfraCo’, which measured and enhanced the performance of the existing firms in the telco industry as well as supplied with more and diversified opportunities for new entrants after the NBN period (Gerrand 2019). Next, the company completely change their tariff rates in order to serve the customers with more potentials. Thirdly, Telstra took innovative measures to reduce their production cost by almost $2.5 billion in 2022. This in result has the opportunity of higher profit margin accumulation. Moreover, by getting inspired, the competitor firms can also adopt the said upgradations and ultimately the total service supply in the economy will expand. Fourthly, no matter how much alteration takes place, Telstra focused on being the premium brand with 5G adopting targets. Summing up, Telstra mainly focused on transitioning of their operations to digital segmentations.
Another way Telstra is influencing the market is through industry 4.0 (Sony and Naik 2019). According to this framework, manufacturing units must adopt the fourth-generation industrialisation methods connected with technological innovation and development to improve and spread their products. Now, Telstra, by adopting this measure is basically targeting the 5G connectivity and computation to provide services to the commercial entities of Australia (Colombi et al. 2020). In order to achieve so, it has made a collaboration with the establishment Ericsson and they are aiming to develop a reusable “edge cloud solution”. In this way, telco companies will have better accessibility in the communication with their serving clients and the supply of service will be intensified and more rapid.
Both these scenarios are suggesting that due to adoption of technological advancements on Telstra’s part actually gives prospects to its competing firms as well as provide incentives to new firms. Although an oligopoly operates with high barriers, efficient firms in reality can enhance the competitiveness and eventually growth. Hence, in both of the cases discussed above, the total supply of goods and services had a chance of increase which ultimately result in higher growth and lower price. This scenario is expressed through the following diagram. The horizontal axis denotes the quantity of goods and services as provided by the telecom industry and the vertical axis denotes the price for the same. Now, as due to technological improvements, the country attains a higher supply of telco services, the supply curve shifts from S to S1 and results in higher quantity (from Q1 to Q2) and lower price (from P1 to P2). This signifies a growth in the total output with a decline in the price level.
Conclusion:
In conclusion it can be said that, Telstra is a leading firm based in Australia whose operating dynamics is spread across the world. it belongs to the telecommunication industry and thus faces an oligopolistic market competition. Aside from Telstra the other dominant firms who hold more of the market shares are Optus and Vodafone. Using the Herfindahl Index, it could be seen that the value of market concentration is higher which implies, the competitiveness is intense in the telecommunication industry of Australia. Recently, Telstra had adopted innovative measures and Industry 4.0 to develop their services and to initiate the functioning of 5G services. This policy measure adoption had resulted in lower cost of service providing and a rise in the total volume of services in the entire domestic border of Australia. In other words, growth occurred in the economy as total supply expanded. Hence, it ca be said that the market had drastically improved as Telstra initiated innovation and technological advancements.
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