The Value of a Free Market: How Competition in the Telecom Industry Benefits Consumers
It's an article of faith in economics that competition is good both for consumers and for society. Governments around the world pursue antitrust strategies to promote competition in the marketplace, fearing that a market structure without many competing companies will lead to higher prices and worse quality. Yet the mechanisms by which a market structure with greater competition encourages companies to diversify their product selection have thus far been poorly understood. New research by Brian Viard, Assistant Professor of Strategy and Economics at Cheung Kong GSB, and fellow researchers sheds some light on to what extent and how increased competition actually provides benefits for consumers.
Viard's research focuses on the U.S. mobile phone industry between 1996 and 1998. During those years, due to changes in technology and regulatory policy, nearly every major city in the United States went from a duopolistic market – one in which only two companies are present – to a much freer market with several players. Furthermore, the new entrants into each market set up their networks using a new, digital technology, instead of the analog systems used by the existing players.
Therefore, the older networks were faced with two major questions as they responded to the increased competition. First, should they adopt the new technology or stick with the systems already in place? And second, should they distinguish themselves from their competitors by offering additional mobile phone plans for users – for example, plans with lower initial costs but higher per-minute charges for people who don't use their phone often and others with higher monthly charges but more "free minutes" for heavier users?
At first glance, the answer may seem obvious – of course a company would want to bring in customers via "tailor-made" products and the latest technology. But there are costs to these moves. Adding more plans requires more marketing dollars and billing costs to support them. More plans also increase the complexity for customers who must determine which of the multitude of plans will provide them the lowest cost of service. Such "choice overload" might lead customers to join a different carrier.
On the question of changing to digital technology, the issue for the older companies was even less clear. At that point, digital mobile phone technology did seem like the future of the industry, but the technology was young enough that the benefits were not yet obvious and it could turn out to be a false start. Furthermore, switching from analog to digital involved a significant cost – one that was likely to fall if the companies waited, as the technology matured and became more available. Therefore, these companies were faced with an unpalatable choice: either save money by sticking with analog for the time being and risk being pushed out of the market completely if their new competitors using digital technology got an edge; or spend top dollar for a new and relatively unproven technology to try to hold on to a shrinking piece of the pie.
But on both questions, Viard found that competition drove the companies to offer consumers more and better products. Over the two years, the existing networks in more competitive markets were more likely to switch to digital, and also offered more and more distinct plans for users than they had previously.
Viard points out that these changes were not necessarily good for consumers – that would depend on what the prices actually offered by the companies were and how these changed over the period, which was outside the scope of Viard's research. Yes, they may have had more pricing plans than they used to, but this change may just have made it easier for the companies to more efficiently squeeze out every dime possible from their users. And while consumers may have gained increased access to the newest technology, the companies may have passed the added costs for that technology on to them. But, Viard notes, it's also possible that these changes represent a win-win for both consumers and companies, since given the added choices each is more likely to find the "partner" that works best for them.
Viard is reluctant to say what the implications of his research are for the Chinese market. Especially because the major players in the Chinese mobile phone sector - China Mobile, China Unicom, and China Telecom - are state-owned, their pricing strategies may not be entirely market-driven. Therefore, even if additional players enter the sector in China, there's no telling whether the effect on prices would be the same as it was in the United States. But Viard's research might be something the Chinese government could consider if it moves toward liberalizing the industry in the future, since it indicates that such a move is likely to benefit consumers and companies alike. Furthermore, the research suggests that the government may want to consider opening up the lucrative mobile phone application market even further to new entrants, since such a move could both drive down prices and make a wider range of applications available to the public. Therefore, as China continues to reform its economy and move toward a free market, the implications of Viard's research may become more and more visible.
It's an article of faith in economics that competition is good both for consumers and for society. Governments around the world pursue antitrust strategies to promote competition in the marketplace, fearing that a market structure without many competing companies will lead to higher prices and worse quality. Yet the mechanisms by which a market structure with greater competition encourages companies to diversify their product selection have thus far been poorly understood. New research by Brian Viard, Assistant Professor of Strategy and Economics at Cheung Kong GSB, and fellow researchers sheds some light on to what extent and how increased competition actually provides benefits for consumers.
Viard's research focuses on the U.S. mobile phone industry between 1996 and 1998. During those years, due to changes in technology and regulatory policy, nearly every major city in the United States went from a duopolistic market – one in which only two companies are present – to a much freer market with several players. Furthermore, the new entrants into each market set up their networks using a new, digital technology, instead of the analog systems used by the existing players.
Therefore, the older networks were faced with two major questions as they responded to the increased competition. First, should they adopt the new technology or stick with the systems already in place? And second, should they distinguish themselves from their competitors by offering additional mobile phone plans for users – for example, plans with lower initial costs but higher per-minute charges for people who don't use their phone often and others with higher monthly charges but more "free minutes" for heavier users?
At first glance, the answer may seem obvious – of course a company would want to bring in customers via "tailor-made" products and the latest technology. But there are costs to these moves. Adding more plans requires more marketing dollars and billing costs to support them. More plans also increase the complexity for customers who must determine which of the multitude of plans will provide them the lowest cost of service. Such "choice overload" might lead customers to join a different carrier.
On the question of changing to digital technology, the issue for the older companies was even less clear. At that point, digital mobile phone technology did seem like the future of the industry, but the technology was young enough that the benefits were not yet obvious and it could turn out to be a false start. Furthermore, switching from analog to digital involved a significant cost – one that was likely to fall if the companies waited, as the technology matured and became more available. Therefore, these companies were faced with an unpalatable choice: either save money by sticking with analog for the time being and risk being pushed out of the market completely if their new competitors using digital technology got an edge; or spend top dollar for a new and relatively unproven technology to try to hold on to a shrinking piece of the pie.
But on both questions, Viard found that competition drove the companies to offer consumers more and better products. Over the two years, the existing networks in more competitive markets were more likely to switch to digital, and also offered more and more distinct plans for users than they had previously.
Viard points out that these changes were not necessarily good for consumers – that would depend on what the prices actually offered by the companies were and how these changed over the period, which was outside the scope of Viard's research. Yes, they may have had more pricing plans than they used to, but this change may just have made it easier for the companies to more efficiently squeeze out every dime possible from their users. And while consumers may have gained increased access to the newest technology, the companies may have passed the added costs for that technology on to them. But, Viard notes, it's also possible that these changes represent a win-win for both consumers and companies, since given the added choices each is more likely to find the "partner" that works best for them.
Viard is reluctant to say what the implications of his research are for the Chinese market. Especially because the major players in the Chinese mobile phone sector - China Mobile, China Unicom, and China Telecom - are state-owned, their pricing strategies may not be entirely market-driven. Therefore, even if additional players enter the sector in China, there's no telling whether the effect on prices would be the same as it was in the United States. But Viard's research might be something the Chinese government could consider if it moves toward liberalizing the industry in the future, since it indicates that such a move is likely to benefit consumers and companies alike. Furthermore, the research suggests that the government may want to consider opening up the lucrative mobile phone application market even further to new entrants, since such a move could both drive down prices and make a wider range of applications available to the public. Therefore, as China continues to reform its economy and move toward a free market, the implications of Viard's research may become more and more visible.
The Value of a Free Market: How Competition in the Telecom Industry Benefits Consumers
It's an article of faith in economics that competition is good both for consumers and for society. Governments around the world pursue antitrust strategies to promote competition in the marketplace, fearing that a market structure without many competing companies will lead to higher prices and worse quality. Yet the mechanisms by which a market structure with greater competition encourages companies to diversify their product selection have thus far been poorly understood. New research by Brian Viard, Assistant Professor of Strategy and Economics at Cheung Kong GSB, and fellow researchers sheds some light on to what extent and how increased competition actually provides benefits for consumers.
Viard's research focuses on the U.S. mobile phone industry between 1996 and 1998. During those years, due to changes in technology and regulatory policy, nearly every major city in the United States went from a duopolistic market – one in which only two companies are present – to a much freer market with several players. Furthermore, the new entrants into each market set up their networks using a new, digital technology, instead of the analog systems used by the existing players.
Therefore, the older networks were faced with two major questions as they responded to the increased competition. First, should they adopt the new technology or stick with the systems already in place? And second, should they distinguish themselves from their competitors by offering additional mobile phone plans for users – for example, plans with lower initial costs but higher per-minute charges for people who don't use their phone often and others with higher monthly charges but more "free minutes" for heavier users?
At first glance, the answer may seem obvious – of course a company would want to bring in customers via "tailor-made" products and the latest technology. But there are costs to these moves. Adding more plans requires more marketing dollars and billing costs to support them. More plans also increase the complexity for customers who must determine which of the multitude of plans will provide them the lowest cost of service. Such "choice overload" might lead customers to join a different carrier.
On the question of changing to digital technology, the issue for the older companies was even less clear. At that point, digital mobile phone technology did seem like the future of the industry, but the technology was young enough that the benefits were not yet obvious and it could turn out to be a false start. Furthermore, switching from analog to digital involved a significant cost – one that was likely to fall if the companies waited, as the technology matured and became more available. Therefore, these companies were faced with an unpalatable choice: either save money by sticking with analog for the time being and risk being pushed out of the market completely if their new competitors using digital technology got an edge; or spend top dollar for a new and relatively unproven technology to try to hold on to a shrinking piece of the pie.
But on both questions, Viard found that competition drove the companies to offer consumers more and better products. Over the two years, the existing networks in more competitive markets were more likely to switch to digital, and also offered more and more distinct plans for users than they had previously.
Viard points out that these changes were not necessarily good for consumers – that would depend on what the prices actually offered by the companies were and how these changed over the period, which was outside the scope of Viard's research. Yes, they may have had more pricing plans than they used to, but this change may just have made it easier for the companies to more efficiently squeeze out every dime possible from their users. And while consumers may have gained increased access to the newest technology, the companies may have passed the added costs for that technology on to them. But, Viard notes, it's also possible that these changes represent a win-win for both consumers and companies, since given the added choices each is more likely to find the "partner" that works best for them.
Viard is reluctant to say what the implications of his research are for the Chinese market. Especially because the major players in the Chinese mobile phone sector - China Mobile, China Unicom, and China Telecom - are state-owned, their pricing strategies may not be entirely market-driven. Therefore, even if additional players enter the sector in China, there's no telling whether the effect on prices would be the same as it was in the United States. But Viard's research might be something the Chinese government could consider if it moves toward liberalizing the industry in the future, since it indicates that such a move is likely to benefit consumers and companies alike. Furthermore, the research suggests that the government may want to consider opening up the lucrative mobile phone application market even further to new entrants, since such a move could both drive down prices and make a wider range of applications available to the public. Therefore, as China continues to reform its economy and move toward a free market, the implications of Viard's research may become more and more visible.
The Value of a Free Market: How Competition in the Telecom Industry Benefits Consumers
It's an article of faith in economics that competition is good both for consumers and for society. Governments around the world pursue antitrust strategies to promote competition in the marketplace, fearing that a market structure without many competing companies will lead to higher prices and worse quality. Yet the mechanisms by which a market structure with greater competition encourages companies to diversify their product selection have thus far been poorly understood. New research by Brian Viard, Assistant Professor of Strategy and Economics at Cheung Kong GSB, and fellow researchers sheds some light on to what extent and how increased competition actually provides benefits for consumers.
Viard's research focuses on the U.S. mobile phone industry between 1996 and 1998. During those years, due to changes in technology and regulatory policy, nearly every major city in the United States went from a duopolistic market – one in which only two companies are present – to a much freer market with several players. Furthermore, the new entrants into each market set up their networks using a new, digital technology, instead of the analog systems used by the existing players.
Therefore, the older networks were faced with two major questions as they responded to the increased competition. First, should they adopt the new technology or stick with the systems already in place? And second, should they distinguish themselves from their competitors by offering additional mobile phone plans for users – for example, plans with lower initial costs but higher per-minute charges for people who don't use their phone often and others with higher monthly charges but more "free minutes" for heavier users?
At first glance, the answer may seem obvious – of course a company would want to bring in customers via "tailor-made" products and the latest technology. But there are costs to these moves. Adding more plans requires more marketing dollars and billing costs to support them. More plans also increase the complexity for customers who must determine which of the multitude of plans will provide them the lowest cost of service. Such "choice overload" might lead customers to join a different carrier.
On the question of changing to digital technology, the issue for the older companies was even less clear. At that point, digital mobile phone technology did seem like the future of the industry, but the technology was young enough that the benefits were not yet obvious and it could turn out to be a false start. Furthermore, switching from analog to digital involved a significant cost – one that was likely to fall if the companies waited, as the technology matured and became more available. Therefore, these companies were faced with an unpalatable choice: either save money by sticking with analog for the time being and risk being pushed out of the market completely if their new competitors using digital technology got an edge; or spend top dollar for a new and relatively unproven technology to try to hold on to a shrinking piece of the pie.
But on both questions, Viard found that competition drove the companies to offer consumers more and better products. Over the two years, the existing networks in more competitive markets were more likely to switch to digital, and also offered more and more distinct plans for users than they had previously.
Viard points out that these changes were not necessarily good for consumers – that would depend on what the prices actually offered by the companies were and how these changed over the period, which was outside the scope of Viard's research. Yes, they may have had more pricing plans than they used to, but this change may just have made it easier for the companies to more efficiently squeeze out every dime possible from their users. And while consumers may have gained increased access to the newest technology, the companies may have passed the added costs for that technology on to them. But, Viard notes, it's also possible that these changes represent a win-win for both consumers and companies, since given the added choices each is more likely to find the "partner" that works best for them.
Viard is reluctant to say what the implications of his research are for the Chinese market. Especially because the major players in the Chinese mobile phone sector - China Mobile, China Unicom, and China Telecom - are state-owned, their pricing strategies may not be entirely market-driven. Therefore, even if additional players enter the sector in China, there's no telling whether the effect on prices would be the same as it was in the United States. But Viard's research might be something the Chinese government could consider if it moves toward liberalizing the industry in the future, since it indicates that such a move is likely to benefit consumers and companies alike. Furthermore, the research suggests that the government may want to consider opening up the lucrative mobile phone application market even further to new entrants, since such a move could both drive down prices and make a wider range of applications available to the public. Therefore, as China continues to reform its economy and move toward a free market, the implications of Viard's research may become more and more visible.
The Value of a Free Market: How Competition in the Telecom Industry Benefits Consumers
It's an article of faith in economics that competition is good both for consumers and for society. Governments around the world pursue antitrust strategies to promote competition in the marketplace, fearing that a market structure without many competing companies will lead to higher prices and worse quality. Yet the mechanisms by which a market structure with greater competition encourages companies to diversify their product selection have thus far been poorly understood. New research by Brian Viard, Assistant Professor of Strategy and Economics at Cheung Kong GSB, and fellow researchers sheds some light on to what extent and how increased competition actually provides benefits for consumers.
Viard's research focuses on the U.S. mobile phone industry between 1996 and 1998. During those years, due to changes in technology and regulatory policy, nearly every major city in the United States went from a duopolistic market – one in which only two companies are present – to a much freer market with several players. Furthermore, the new entrants into each market set up their networks using a new, digital technology, instead of the analog systems used by the existing players.
Therefore, the older networks were faced with two major questions as they responded to the increased competition. First, should they adopt the new technology or stick with the systems already in place? And second, should they distinguish themselves from their competitors by offering additional mobile phone plans for users – for example, plans with lower initial costs but higher per-minute charges for people who don't use their phone often and others with higher monthly charges but more "free minutes" for heavier users?
At first glance, the answer may seem obvious – of course a company would want to bring in customers via "tailor-made" products and the latest technology. But there are costs to these moves. Adding more plans requires more marketing dollars and billing costs to support them. More plans also increase the complexity for customers who must determine which of the multitude of plans will provide them the lowest cost of service. Such "choice overload" might lead customers to join a different carrier.
On the question of changing to digital technology, the issue for the older companies was even less clear. At that point, digital mobile phone technology did seem like the future of the industry, but the technology was young enough that the benefits were not yet obvious and it could turn out to be a false start. Furthermore, switching from analog to digital involved a significant cost – one that was likely to fall if the companies waited, as the technology matured and became more available. Therefore, these companies were faced with an unpalatable choice: either save money by sticking with analog for the time being and risk being pushed out of the market completely if their new competitors using digital technology got an edge; or spend top dollar for a new and relatively unproven technology to try to hold on to a shrinking piece of the pie.
But on both questions, Viard found that competition drove the companies to offer consumers more and better products. Over the two years, the existing networks in more competitive markets were more likely to switch to digital, and also offered more and more distinct plans for users than they had previously.
Viard points out that these changes were not necessarily good for consumers – that would depend on what the prices actually offered by the companies were and how these changed over the period, which was outside the scope of Viard's research. Yes, they may have had more pricing plans than they used to, but this change may just have made it easier for the companies to more efficiently squeeze out every dime possible from their users. And while consumers may have gained increased access to the newest technology, the companies may have passed the added costs for that technology on to them. But, Viard notes, it's also possible that these changes represent a win-win for both consumers and companies, since given the added choices each is more likely to find the "partner" that works best for them.
Viard is reluctant to say what the implications of his research are for the Chinese market. Especially because the major players in the Chinese mobile phone sector - China Mobile, China Unicom, and China Telecom - are state-owned, their pricing strategies may not be entirely market-driven. Therefore, even if additional players enter the sector in China, there's no telling whether the effect on prices would be the same as it was in the United States. But Viard's research might be something the Chinese government could consider if it moves toward liberalizing the industry in the future, since it indicates that such a move is likely to benefit consumers and companies alike. Furthermore, the research suggests that the government may want to consider opening up the lucrative mobile phone application market even further to new entrants, since such a move could both drive down prices and make a wider range of applications available to the public. Therefore, as China continues to reform its economy and move toward a free market, the implications of Viard's research may become more and more visible.
It's an article of faith in economics that competition is good both for consumers and for society. Governments around the world pursue antitrust strategies to promote competition in the marketplace, fearing that a market structure without many competing companies will lead to higher prices and worse quality. Yet the mechanisms by which a market structure with greater competition encourages companies to diversify their product selection have thus far been poorly understood. New research by Brian Viard, Assistant Professor of Strategy and Economics at Cheung Kong GSB, and fellow researchers sheds some light on to what extent and how increased competition actually provides benefits for consumers.
Viard's research focuses on the U.S. mobile phone industry between 1996 and 1998. During those years, due to changes in technology and regulatory policy, nearly every major city in the United States went from a duopolistic market – one in which only two companies are present – to a much freer market with several players. Furthermore, the new entrants into each market set up their networks using a new, digital technology, instead of the analog systems used by the existing players.
Therefore, the older networks were faced with two major questions as they responded to the increased competition. First, should they adopt the new technology or stick with the systems already in place? And second, should they distinguish themselves from their competitors by offering additional mobile phone plans for users – for example, plans with lower initial costs but higher per-minute charges for people who don't use their phone often and others with higher monthly charges but more "free minutes" for heavier users?
At first glance, the answer may seem obvious – of course a company would want to bring in customers via "tailor-made" products and the latest technology. But there are costs to these moves. Adding more plans requires more marketing dollars and billing costs to support them. More plans also increase the complexity for customers who must determine which of the multitude of plans will provide them the lowest cost of service. Such "choice overload" might lead customers to join a different carrier.
On the question of changing to digital technology, the issue for the older companies was even less clear. At that point, digital mobile phone technology did seem like the future of the industry, but the technology was young enough that the benefits were not yet obvious and it could turn out to be a false start. Furthermore, switching from analog to digital involved a significant cost – one that was likely to fall if the companies waited, as the technology matured and became more available. Therefore, these companies were faced with an unpalatable choice: either save money by sticking with analog for the time being and risk being pushed out of the market completely if their new competitors using digital technology got an edge; or spend top dollar for a new and relatively unproven technology to try to hold on to a shrinking piece of the pie.
But on both questions, Viard found that competition drove the companies to offer consumers more and better products. Over the two years, the existing networks in more competitive markets were more likely to switch to digital, and also offered more and more distinct plans for users than they had previously.
Viard points out that these changes were not necessarily good for consumers – that would depend on what the prices actually offered by the companies were and how these changed over the period, which was outside the scope of Viard's research. Yes, they may have had more pricing plans than they used to, but this change may just have made it easier for the companies to more efficiently squeeze out every dime possible from their users. And while consumers may have gained increased access to the newest technology, the companies may have passed the added costs for that technology on to them. But, Viard notes, it's also possible that these changes represent a win-win for both consumers and companies, since given the added choices each is more likely to find the "partner" that works best for them.
Viard is reluctant to say what the implications of his research are for the Chinese market. Especially because the major players in the Chinese mobile phone sector - China Mobile, China Unicom, and China Telecom - are state-owned, their pricing strategies may not be entirely market-driven. Therefore, even if additional players enter the sector in China, there's no telling whether the effect on prices would be the same as it was in the United States. But Viard's research might be something the Chinese government could consider if it moves toward liberalizing the industry in the future, since it indicates that such a move is likely to benefit consumers and companies alike. Furthermore, the research suggests that the government may want to consider opening up the lucrative mobile phone application market even further to new entrants, since such a move could both drive down prices and make a wider range of applications available to the public. Therefore, as China continues to reform its economy and move toward a free market, the implications of Viard's research may become more and more visible.
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