ECN5111 Microeconomics for Policy Assessment Answer

Introduction

The term market concentration refers to the degree to which companies that are actively participating in a market are able to exert influence over the prices of the products that they offer. Oligopolies are a type of market structure in which a significant amount of power is held by a relatively small number of enterprises. The concentration of power in a single company is one of the defining characteristics of a monopoly. The study will highlight about the market of mobile network operators and the tertiary education sectors in Zambia and how two measures of concentration can be implied in the given market.

Discussion

There are numerous metrics and indices that have been proposed for use as indicators of concentration, in particular for market concentration that is determined by market shares. The application of a variety of indices is typical practice in the industry; nevertheless, the concentration ratio and the Herfindahl-Hirschman index are the two metrics that are utilized the majority of the time. The recently developed index offers a more precise evaluation of the degree of concentration. It also enables valid comparisons to be performed between index values in terms of their respective orders and differences, which, in turn, reflect the actual concentration, attribute (Arnold, 2019).

The market concentration ratio is a metric that is used to quantify the overall market share that is held by the largest firms that are functioning within an industry. A company's performance can be evaluated using a variety of measures, such as sales numbers, employment data, client usage rates, and the number of business locations, to name just a few of the possible candidates. It is possible that the relevance of leading corporations, which are also referred to as top firms or top 'n' firms, will be limited to a maximum of three to five enterprises (Stiglitz, 2019).

The Herfindahl-Hirschman Index depends on a clear definition of a market, which is based on the idea that products can be swapped out for each other. Because the index isn't balanced in terms of the adjacent niche groups that operators serve in addition to their main cellular activities, substitutability may be limited to some degree. A convergent operator is more likely to have more market power than a traditional operator that focuses mostly on mobile voice services because it can meet the demand for fixed telephone, internet, and TV services.

Many products and services are available to businesses and individuals through the telecommunications sector. More and more technologies and channels of communication enable the provision of these services. The optimal place to investigate how competition affects performance is at the local market level, where these services are really exchanged for money. However, due to the scarcity of data, there is a trade-off between the level of disaggregation preferred and the possibility of international comparisons. In addition, certain services remain essentially monopolies worldwide, while others have enjoyed healthy levels of competition throughout the most of the 1990s. Analysis of these services would not make the connection between competition and success obvious (Arnold, 2019).

 Mobile network providers can offer coverage in different parts of the world, which keeps them from directly competing with each other. When a mobile operator's coverage is limited to a certain city or town, it is not safe to assume that it is interchangeable with an operator in a different city. For these markets, it is possible to figure out the Herfindahl-Hirschman Index for the whole state. It is clear that a more thorough study using the Herfindahl-Hirschman Index would need to go beyond just figuring out a single HHI number for a country based on its share of the connections market. In some markets, it is seen that some operators only report the number of current subscribers, while others report all SIM cards that have been registered. This practice causes a change in the way market shares are split up, which, according to the HHI method, changes the amount of market concentration. The Herfindahl-Hirschman Index does not take into account the wide variety of network deployments, existing systems, investment goals and cost reductions or operating expenditures. Apart from this, the range and standard of services, brand recognition, cultural preferences, and the gross domestic product per person are not taken into account (Burke, Jayne & Sitko,2020).

ZCCM, which stands for Zambia Consolidated Copper Mines Ltd., has traditionally been the most significant aspect of Zambia's commercial sector. It was the most successful business in the nation, the most important contributor of foreign currency, and the nerve center of the nation's economy. The majority of Zambia's infrastructure was developed to support the country's mining industry. This endeavor started with the construction of trains in the early part of the 20th century. The mines have a significant need for power, which is supplied by ZESCO, which is another state-owned business. Because there were a lot of people working in mines in the Copperbelt region, there was a high need for affordable food, therefore agricultural techniques concentrated on reducing the costs of production. Unfortunately, around the same period, the currencies of a large number of emerging countries saw a significant decline. This indicates that the expense of information and communication technologies will continue to be a significant obstacle in their adoption. The percentage of the economy that was contributed by the information and communications technology industry increased from 2% in the second quarter of 2022 to 3.5% in the third quarter of the same year. According to the projections provided by the Ministry of Finance and National Planning, the expansion of the nation will amount to an average of 3.1% in the year 2022. Because the economy is doing well, it is anticipated that this will be positive for the information and communications technology industry because there will be greater demand for ICT services as a result of the economy's success. The yearly inflation rate, as measured by the Consumer Price Index, went from 16.4% to 9.9% throughout the time period that was being referenced. This indicates that there was around a 40% decrease in the overall price increase. The annual rate of price rises across the board in the information and communications technology industry dropped from 2.5 percent at the end of December 2021 to 1 percent at the end of December 2022, representing a decline of 60 percent (Crouzet & Eberly, 2019). 

There is no doubt that people in every region of the world are becoming considerably more interested in the ways in which ICT may contribute to the expansion of the economy. Developed nations are working to strengthen their position as market leaders by expanding the use of information and communication technologies throughout their national economies. On the other hand, the majority of developing nations are working toward the goal of moving beyond a knowledge of the potential benefits of the technology to the creation of timelines for its usage that are both attainable and plausible. If an economy has shaky roots or a dearth of inputs like skilled employees, the concept of being able to "jumpfrog" technical breakthroughs, which is theoretically feasible but not particularly practical in practice, is not very helpful (Azar et al. 2019).

But because it is an economy that is predominately centered on services, growth is restricted by factors such as the slow development of a competitive telecommunications industry that is able to sustain the flow of information and communication on a national and international scale. This is necessary in order for the economy to experience rapid expansion. The amount of competition in Zambia's telecommunicationss industry is investigated in this article. Particular focus is given to the fixed line and international gateway, mobile phone, and Internet markets (Burke, Jayne & Sitko,2020).

According to the International Telecommunication Union (ITU), in numerous developing nations, the primary and frequently exclusive means of accessing the Internet is through mobile broadband (3G or higher). By the year 2022, the majority of the global population, specifically 95%, had been granted access to a particular type of service. Achieving a 90 percent threshold in 2018 represented a significant milestone. However, subsequent progress in expanding global 3G coverage has been limited to a mere four percentage points. This has posed a challenge in bridging the "coverage gap" and attaining the remaining five percent of coverage. In the African continent, a disparity of 18% was observed, with a majority of individuals impacted residing in the central and western regions. It is projected that the global population's access to 4G networks will increase twofold from 2015 to 2022, ultimately encompassing 88% of the populace. According to reports, approximately 50% of the population in Africa is purported to possess the capability to utilize 4G technology.

The overall analysis of the telecom sector of Zambia is as follows:-

Figure 1: Analysis of the measures of concentration in case of telecom sector of Zambia

In order to gain an understanding of the competitive landscape of the mobile telecommunications industry, this research makes use of the market share indicator. The authors decided that income was a better indicator of market conditions than the number of subscribers, despite the fact that the number of subscribers might be used to determine market concentration. This indicator can be calculated by taking the income of the participant and dividing it by the total income of all of the players in the market that is being examined (Azar et al. 2019).

According to the findings, the average effective price per minute is slightly less expensive in highly concentrated markets than it is in scattered markets. This is the case. This would imply that there is more price pressure on rival operators in markets where there is just one primary operator (Burke, Jayne & Sitko,2020).

In the year 2010, highly concentrated cellular markets accounted for forty percent of all connections established in Zambia, while fairly concentrated markets accounted for thirty-five percent, and fragmented markets accounted for twenty-five percent of all connections. According to some estimates, more than two thirds of the cellular markets in Africa are controlled by a small number of companies.

In spite of the fact that each of these markets has witnessed the establishment of at least one new provider since 2008, the HHI has increased in virtually all of them over the course of the previous decade. This results in reduced competition and a consistent gap between the market powers of the various entities. There is a chance that the competitive environment will shift in a number of industries where there is still opportunity for connections to increase and where increasing market concentration has been limiting competition. These are both conditions that are conducive to change. Even though these four markets for mobile phones are at different phases of development and face different challenges, it is likely that regulatory initiatives will impact all of them over the course of the next few years.

There is more price competition in concentrated markets, and new entrants or local providers sometimes employ reduced prepaid voice packages to make incumbents less dominant and gain a substantial portion of the market. This strategy is frequently employed in developing spheres where there are a significant number of major participants. On the other hand, operators in more mature markets have a tendency to simplify their offers and rates or rely on novel bundles or successful techniques to meet new or current demand for more affordable voice services. This is done in order to fulfill the need for voice services that are more affordable. Additionally, economies of scale and customer reward programs are highly crucial for maintaining competitive pricing, particularly in regions where growth is driven by consumers upgrading from older models of mobile devices. These factors are undeniable contributors to the decline in HHI seen in both concentrated and scattered market environments.

The owners highlighted that problems with the economy as a whole are a big reason why business costs have gone up. The big drop in the value of the local currency at the end of the previous year had a big effect on the business environment. This was found to be an important feature. According to the operators, ZICTA made it take longer to get approvals for installing equipment, such as laying fiber. Concerns were also made about how much it would cost and how long it would take to put fiber in place if concrete poles were required. The Authority's prediction shows that the adoption and use of ICT services are likely to go well in the next review period. It is expected that the number of active mobile network users will go up, from 19.8 million at the end of 2022 to 20.4 million by the end of 2023 and then to 21.3 million in 2024. Also, it is expected that the number of domestic mobile voice call minutes made by users will rise from an expected 28.5 billion minutes by the end of 2022 to an expected 32.1 billion minutes in 2023 and could reach 34.5 billion minutes in 2024 (Burke, Jayne & Sitko,2020).

The market concentration ratio is a metric that indicates the number of leading firms present in a given market. One approach to accomplish this task is to examine sales figures, employee headcount, active user counts, or other pertinent metrics. The relationship between market concentration and market competition is closely intertwined both in theoretical and practical contexts. Market concentration is a crucial factor that antitrust agencies take into account while evaluating mergers and other regulatory matters. The degree of market concentration is a crucial determinant in assessing a firm's market power with respect to its ability to establish prices and quantities.

Market concentration in case of telecom sector of Zambia is a phenomenon that can be impacted by various factors, including the presence of entry barriers and the level of competition that currently exists within the market. Market concentration ratios help in determining the nature of a market, whether it is perfectly competitive, monopolistic, or oligopolistic (Stiglitz, 2019).

Conclusion

The prices of goods and services are lowered by the government whenever there is increased levels of competition in order to make the market more equitable for a greater number of consumers. In order to achieve a solution that is satisfactory for all parties involved, the regulatory process actively promotes the establishment of competitive markets. The level of competition between different types of enterprises can influence both product costs and quality. Businesses incur expenses in the form of customer recruiting fees in order to acquire new customers and maintain relationships with the consumers they already have.

References

Arnold, D. (2019). Mergers and acquisitions, local labor market concentration, and worker outcomes. Local Labor Market Concentration, and Worker Outcomes (October 27, 2019) .

Felix, M. (2021). Trade, labor market concentration, and wages. Job Market Paper .

Crouzet, N., & Eberly, J. C. (2019). Understanding weak capital investment: The role of market concentration and intangibles (No. w25869). National Bureau of Economic Research.

Olmstead-Rumsey, J. (2019). Market concentration and the productivity slowdown.

Stiglitz, J. E. (2019). Market concentration is threatening the US economy. Project Syndicate , 11 , 1-2.

Azkarate-Askasua, M., & Zerecero, M. (2022). The aggregate effects of labor market concentration. Available at SSRN 4323492.

Pröll, S., Grüneis, H., & Sinabell, F. (2022). Market Concentration, Producer Organizations, and Policy Measures to Strengthen the Opportunities of Farmers for Value Addition—Empirical Findings from the Austrian Meat Supply Chain Using a Multi-Method Approach. Sustainability, 14(4), 2256.

Azar, J., Huet-Vaughn, E., Marinescu, I., Taska, B., & Von Wachter, T. (2019). Minimum wage employment effects and labor market concentration (No. w26101). National Bureau of Economic Research.

Burke, W. J., Jayne, T. S., & Sitko, N. J. (2020). Do medium‐scale farms improve market access conditions for Zambian smallholders?. Journal of Agricultural Economics , 71 (2), 517-533.

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