Answer to Question #194634 in Macroeconomics for hafsa

Question

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

a)When the government allows more firms to operate in the economy, the telecom authority that was a monopoly firm will be changed to an oligopoly market structure. Firms with similar market structures and equal sizes could rationalize the prices in the long run. If this situation continues the oligopoly market structure will shift to a perfectly competitive market structure when there are a large number of firms to operate.

b) When more and more new firms enter the market, this will change to a perfectly competitive market and prices. It will make the prices touch at the bottom with thin margins. The consumers will be getting a wide variety of options, within that they can make a consumption decision which offers a high-quality service at a low cost. In the long run, when profit is held with a single firm, there will be the possibility of getting merged by firms, and thus cost optimization and revenue maximization can take place. In oligopolistic and monopolistic market structure profit maximization takes place.

c)In oligopoly market, profit is maximized by equiting marginal cost with marginal revenue resulting to equilibrium price P and equilibrium quantity Q.