In markets with relatively few large competing firms, there is a risk of consumer harm. This market structure is prevalent in the communications sector. Ofcom has undertaken this study to understand how such a market might be affected by one firm acting as a ‘disruptive’ operator.
Consumer harm in concentrated markets can arise even without a single dominant company or companies engaging in overt collusion. It may take the form of prices being substantially above costs or product quality being low. These problems can be exacerbated where takeovers or mergers lead to even fewer, bigger network operators.
Mobile communications is an industry which has historically been associated with a number of disruptive firms. In addition, in recent years there has been a trend of mergers and consolidation in mobile markets, some of which have involved so-called disruptive firms.
So Ofcom wanted to test a starting hypothesis that disruptive firms (which do not follow the crowd and actively disturb existing market dynamics) may act as an important competitive constraint where there is a limited number of large firms in a market; and that mergers or takeovers involving a disruptive firm, can reduce that competitive constraint to the detriment of consumers.
To test our starting hypothesis, we undertook a cross-country econometric study to examine the effects on pricing of disruptive firms in the mobile markets of a group of countries. Our statistical analysis compares mobile prices across twenty-five countries over the period 2010-2015, controlling for characteristics of differentiated mobile tariffs and country-specific effects.
Our findings support the proposition that disruptive firms reduce prices in the markets in which they operate. They also support the proposition that greater competition - delivered by a greater number of players - has a positive effect on pricing.