Answer to Question #194832 in Macroeconomics for Abdul basit

Question

Question No. 03

The Telecommunications Regulatory Authority (TRA) is the UAE’s independent industry regulator. Since its launch in 1976, Etisalat has held a monopoly in the market. That changed in 2006 with the emergence of du, which was awarded a 20-year concession to operate fixed-line, wireless, internet and international telecoms services. UAE-based telecom operator recently announced that it was launching Virgin Mobile as a new telecom brand within the country. Assuming the trend continues and the government opens the market for more private and foreign players. You are required to–

 

a). Apply your understanding and concepts to investigate and summarize the major characteristics of the emerging market form in the telecom industry.

b). Describe and analyze the pricing policies that you would expect to find in this industry. 

c). Explain the profit maximization strategy of this market form with the help of a suitable graph.

Answer 1

Solution:

a.). The form of market that will emerge if the government opens the market for easy entry, is an oligopoly. Currently, the market is monopolistic since only one single firm dominates it, but once other firms are allowed, it will turn into an oligopoly market. This is characterized by a few large firms dominating the market and it will be highly concentrated. Barriers of entry will exist and they will deal with identical or differentiated products.

 

b.). The pricing policy that will be expected in the oligopolistic market will be mostly predatory pricing to force rivals out of the market, by keeping prices below the full cost of production. Oligopolists may also collude with rivals to raise prices together and hence get higher profit margins than they would in a more competitive market.

 

 

c.). The profit maximization strategy adopted by the oligopolistic market is where they maximize profits by equating marginal revenue with marginal cost, which results in an equilibrium output (Q) and equilibrium price (P). At that point, they will be able to maximize their profits.

It is depicted by the below graph: