Liberalisation of the Telecommunications Market
Total Page:16
File Type:pdf, Size:1020Kb
LIBERALISATION OF THE TELECOMMUNICATIONS MARKET by SHONA H. DOBBIE Thesis for the degree of Ph.D, University of London, and the Diploma of Imperial College. Department of Social & Economic Studies Imperial College University of London April 1987. ABSTRACT This study attempts to analyse the economic effects of liberalisation in the market for telecommunications customer premises equipment. Within the structure-conduct-performance framework an attempt is made to examine the effects of increased competition, to estimate the effect of imposed structural changes on the conduct of incumbent firms and to compare their behaviour with that of recent entrants into the liberalised market. The methodology incorporated in this study involves the undertaking of an extensive interview programme. This covers both government bodies and the senior management of equipment manufacturers and suppliers, and is designed to complement the available published data. The originality claimed relates to the research programme itself and the subsequent use of the data collected to analyse the economic impact of liberalisation, both in the general equipment market and in sub-markets for large PABX, small business equipment and telephone handsets. The results of this study suggest that competition is strongest in the market for small business equipment which is characterised by a higher total sales value than the handset and large PABX markets, and a higher sales volume than the latter. In each of the three sub- markets examined the incumbent firms have started with a competitive advantage over their rivals, but have not exploited this to the full. Foreign firms stand to gain relatively more than domestic firms from the unreciprocated opportunities presently available in the UK. Competition has been successfully increased through government policy. The conduct of the market participants has altered significantly as a result, but it is doubtful whether the structural changes will help domestic firms to both establish and maintain a leading position in the world telecommunications market; indeed the reverse may be true. 2 CONTENTS PAGE ABSTRACT 2 ACKNOWLEDGEMENTS 10 GLOSSARY 12 CHAPTER ONE : INTRODUCTION 15 Notes 22 CHAPTER TWO : DEVELOPMENT OF THE INDUSTRY (I) PREFACE 23 (II) INITITAL DEVELOPMENTS 24 The Post Office Takeover of the Network 26 (III) CO-OPERATION BETWEEN EQUIPMENT MANUFACTURERS 30 The 1920s and 1930s 32 The BTTDC and MTDC 34 Increased Levels of Demand 36 The JERC 38 (IV) THE 1960s AND 1970s 40 The 1969 Post Office Act 41 Problems Facing the Post Office 44 Problems Facing Manufacturers and Consumers 46 The Carter Report 47 Market Size in 1980 50 (V) EVALUATION AND CONCLUSION 52 Notes 55 CHAPTER THREE : LIBERALISATION POLICY 1980-84 (I) PREFACE 56 (II) LIBERALISATION OF THE US TELECOMMUNICATIONS MARKET Liberalisation of the Provision of Telecommunications Services 57 Liberalisation of the Equipment Market 59 Divestiture 61 Relevance of Policy for the UK Market 62 (III) LIBERALISATION IN THE UK The Beesley Report 64 The 1981 Telecommunications Act 65 The Littlechild Report 69 The 1984 Telecommunications Act 71 The Office of Telecommunications 73 The British Approvals Board for Telecommunications 76 (IV) EVALUATION AND CONCLUSION 80 Notes 83 CHAPTER FOUR : MARKET THEORY AND HYPOTHESES (I) PREFACE 84 (II) MARKET THEORY The Competitive Model 86 Oligopoly and Conjectural Variations 89 Workable Competition 93 Contestable Markets 97 Games Theory 101 (III) LIMITATIONS TO THE PERFECT SOLUTION The Presence of Externalities 103 Absolute Cost Advantages 106 Economies of Scale 108 Product Differentiation 109 Research and Development 112 International Competition 115 The Presence of Monopoly Power Among Buyers 118 4 The Problem of the Second Best 119 Entry and Social Efficiency 120 (IV) COMPETITION IN THE TELECOMMUNICATIONS MARKET 124 (V) EVALUATION AND HYPOTHESES 128 CHAPTER FIVE : AN ANALYSIS OF PRODUCT MARKETS AND COMPETING COMPANIES : THE MARKET FOR LARGE PABX PART (A) PRODUCT MARKETS AND COMPETING GROUPS (I) PREFACE 132 (II) THE SAMPLE OF PARTICIPATING FIRMS The Large Incumbent Firms 136 Small Exclusive Suppliers to British Telecom 139 UK Agent Firms 140 Joint Venture Companies 141 Multinational Companies of Foreign Ownership 142 Small Domestic Companies 144 PART (B) THE MARKET FOR LARGE PABX (I) PREFACE 151 (II) IDENTIFICATION OF THE COMPETITORS British Telecom 153 Other Competitors 153 (III) THE MARKET STRATEGIES OF COMPETING GROUPS (a) Condition of Production, Investment, R&D etc. Incumbent Firms 156 Joint Ventures 158 Multinationals 160 (b) Product Testing and Approval Incumbent Firms 163 Joint Ventures 163 Multinationals 164 5 (c) Retail Distribution, Price and Non- Price Competition Incunbent Firms 166 Joint Ventures 168 Multinationals 171 (IV) ANALYSIS OF QUESTIONNAIRE DATA AND HYPOTHESES TESTING 175 Market Structure 176 Conduct of Market Participants 185 Performance of Market Participants 195 Notes 202 APPENDIX 5.1 : QUESTIONNAIRE 203 CHAPTER SIX : TIE MARKET FOR SMALL BUSINESS PRODUCTS (I) PREFACE 210 (II) IDENTIFICATION OF THE COMPETITORS British Telecom 212 Other Competitors 213 (III) THE MARKET STRATEGIES OF COMPETING GROUPS (a) Conditions of Production, Investment, R&D etc Incumbent Firms 218 Agent Firms 220 Joint Ventures 221 Multinationals 222 Snail Domestic Companies 224 (b) Product Testing and Approval Incunbent Firms 226 Agent Firms 226 Joint Ventures 227 Multinationals 228 Small Domestic Companies 228 (c) Retail Distribution, Price and Non- Price Competition 6 Incumbent Firms 230 Agent Firms 232 Joint Ventures 233 Multinationals 234 Small Domestic Companies 236 (IV) ANALYSIS OF QUESTIONNAIRE DATA AND HYPOTHESES TESTING Market Structure 238 Conduct of Market Participants 247 Performance of Market Participants 257 Notes 265 CHAPTER SEVEN : THE MARKET FOR TELEPHONE HANDSETS (I) PREFACE 266 (II) IDENTIFICATION OF THE COMPETITORS British Telecom 269 Other Competitors 269 (III) THE MARKET STRATEGIES OF COMPETING GROUPS (a) Conditions of Production, Investment, R&D etc Incunbent Firms 274 Suppliers 275 Joint Ventures 277 Multinationals 278 Small Domestic Companies 280 (b) Product Testing and Approval Incumbent Firms 283 Suppliers 283 Joint Ventures 284 Multinationals 284 Small Domestic Companies 285 (c) Retail Distribution, Price and Non- Price Competition Incumbent Firms 286 7 Suppliers 288 Joint Ventures 289 Multinationals 290 Small Domestic Companies 291 (IV) ANALYSIS OF QUESTIONNAIRE DATA AND HYPOTHESES TESTING Market Structure 294 Conduct of Participating Firms 307 Performance of Participating Firms 318 Notes 326 CHAPTER SEVEN : CONCLUSIONS (I) PREFACE 327 (II) RESULTS OF THE ANALYSIS 328 Expectations 329 Hypothesis 1 330 Hypothesis 2 332 Hypothesis 3 333 Further Objectives 334 Summary 338 (III) SUGGESTIONS FOR FURTHER RESEARCH 340 Notes 341 BIBLIOGRAPHY 342 8 t a b l e a n d d i a g r a m s PAGE Table 2.1 The Post Office Takeover of the Telephone Network (1895-1912) 29 Diagram 2.1 Telephone Development Committees (1933-69) 35 Table 2.2 The UK Installed Telephone Base (1925-80) 37 Table 3.1 BT Ordinary Share Ownership (May 1985) 74 Diagram 3.1 Political Structure of the Telecommunications Industry (1985) 75 Table 5.1 Product Markets and Participating Firms 147 Table 5.2 Summary of Structural Results (Large PABX Market) 184 Table 5.3 Summary of Conduct Results (Large PABX Market) 194 Diagram 5.1 Large PABX Market - % Market Share by Value 197 Table 5.4 Summary of Performance Results (Large PABX Market) 200 Table 6.1 Summary of Structural Results (Small Business System Market) 246 Table 6.2 Summary of Conduct Results (Sbiall Business System Market) 256 Diagram 6.1 Small PABX/Key-Telephones - % Market Share by Value 259 Table 6.3 Summary of Performance Results (Small Business System Market) 263 Diagram 7.1 The Handset Market 1984/5 - Product Market Share by Volume 302 Table 7.1 Summary of Structural Results (Handset Market) 306 Table 7.2 Summary of Conduct Results (Handset Market) 317 Diagram 7.2 The Handset Market 1984/5 - % Market Share by Value 320 Table 7.3 Summary of Performance Results (Handset Market) 324 9 ACKNOWLEDGEMENTS This thesis could not have been completed without the assistance of many people, not least being my supervisor, Prof ZA Silberston, whom I would like to thank for giving me the benefit of his time and expertise and for his encouragement as the project developed. The information contained within this thesis has been drawn primarily from a series of interviews with firms participating in the domestic telecommunications market, and with several official bodies. Special thanks must go to the managers or representatives of the twenty-six firms interviewed - without the willingness of these people to donate some of their working hours, during what was, commercially, a demanding period, the objectives of this research would not have been achieved and the project would surely have collapsed. I am especially grateful to the Technical Change Centre who helped me establish initial contact with the major domestic firms, and to Mr JM Price of GEC, Mr JR Hooley of Plessey Office Systems Ltd, Mr P Harmer of TMC and Mr D Huddard of STC. These people were each willing to spend additional time discussing the development of the domestic telecommunications industry, and thereby contributed significantly to my understanding of the industry itself, and some of the complexities involved in introducing a policy designed to alter market structure. In addition to interviews with manufacturing firms, information has also been sourced