Telecommunications Market Structure in the United Arab Emirates

Nicolaj Hansen

IB Student Number: 001375-0056

Dubai American Academy

Subject: Economics

TOTAL WORD COUNT: 4000

Abstract

This essay will examine the telecommunications market in the UAE and whether the

government’s decision to introduce a second firm into the industry has introduced a level of

competitiveness in order to break the monopoly that the telecom operator Etisalat has held

for many years. In this essay I will be aiming to form a response to the research question:

“To what extent is the telecommunications market in the UAE a monopoly?” I will be

evaluating the market structure of the telecommunications industry in the UAE, and explore

whether or not the presence of two firms in the industry creates competition or whether

they operate as a monopoly.

The scope for this essay is to examine the assumptions of various market structure

theories and look to apply them to the telecommunications market in the country where I

presently live. In this essay, the assumptions of the four market structures, the barriers to

entry, the methods of competition, and the number of firms in the industry are covered.

This is done in order to correlate the characteristics of the telecommunications industry of

the UAE with the characteristics of a monopoly.

I have reached the conclusion that although there has been an introduction of

another firm to the telecommunications market in the UAE; it still operates as a monopoly.

The extremely high barriers of entry, due to government regulations, prevent new firms to

enter the market, while the lack of competitiveness between du and Etisalat is shown

through the fact that their services are not available in the same regions. Therefore it can be

concluded that the market still operates as a monopoly.

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Table of Contents

Abstract............................................................................................................................................... 1

Introduction........................................................................................................................................ 3

Hypothesis and Methodology of Research....................................................................................6

Relevant Economic Theories............................................................................................................ 8

1) Monopoly.................................................................................................................................................. 9

2) Assumptions of an oligopoly............................................................................................................... 10

3) Assumptions of a monopolistic market.............................................................................................11

4) Assumptions of perfect competition market....................................................................................13

Data Collection and Analysis......................................................................................................... 15

Number and size of firms in industry..................................................................................................... 15

Methods of competition........................................................................................................................... 17

Barriers to entry......................................................................................................................................... 19

Conclusion........................................................................................................................................ 21

Works Cited...................................................................................................................................... 23

Appendices....................................................................................................................................... 24

2

Introduction

One thing that has experienced rapid growth over the last few decades is the United

Arab Emirates. The UAE began exporting oil in the 1960s, which through the decades would

lead to vast growth in multiple areas. In present day, the UAE has one of the highest income

economies in the world and as a result has emerged as a business hub. With this rapid

growth in the nation, there has been a huge influx of people into the population, and

through the rapid development of technology, the need for items such as mobile phones

and computers with Internet access have become a necessity. People require mobile phones

and laptops on a daily basis in order to conduct business, communicate with family and

friends, and keep up to date with the rest of the world. However, in order to make use of

the Internet and mobile phones, people must have a telecom provider.

Having moved to Dubai in the summer of 2003, I quickly learned of the culture and

various aspects of daily life. When it came to acquiring my first mobile phone, there was

only a choice of one carrier, Etisalat. Etisalat had been founded in 1976 as a joint-stock

company between International Aeradio Limited, a British Company, and local partners. In

1991 the UAE central government issued Federal Law No. 1, which gave the corporation the

right to provide the telecommunications wired and wireless services in the country and

between UAE and other countries. It also gave the firm the right to issue licenses for

owning, importing, manufacturing, using or operating telecommunication equipment. This

practically gave Etisalat both regulatory and control powers, which completed the monopoly

of the telecom giant in the UAE1.

1 "Etisalat Hosting Dubai." Corebiz FZ LLC Dubai Web Hosting Company in Dubai. Web. 25 Oct. 2014.

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This monopoly that Etisalat held in the telecommunications industry in the UAE seemed

to last until The Emirates Integrated Telecommunications Company, later rebranded as du,

was founded in 2005. For the first time consumers in the UAE were left with a decision

between telecom operators. However, the discussion on whether the industry remains a

monopoly is one frequently discussed in economics. This resulted in the research question:

To what extent is the telecommunications market in the UAE a monopoly? This remains a

debate due to the characteristics of the telecom industry in the UAE. Although du

technically ended the monopoly held by Etisalat in 2007, there is still a lack of competition.

This can mainly be seen in areas where only one service provider is available, thus limiting

the consumer to one option.

The next part of this essay will discuss a hypothesis based on personal observations

from my time spent in the UAE. After that relevant economic theories will be discussed in

order to develop a better understanding and how it applies. I will primarily be focusing on

monopolies and duopolies (a specific type of oligopoly) in order to see where the telecom

industry in the UAE would fall. Following that will be research into the topic in order to

verify my hypothesis formed earlier. In this section data will be collected, presented and

analyzed. Finally, a conclusion will be presented in which I aim to answer the research

question and reflect on my findings.

4

Hypothesis and Methodology of Research

My hypothesis is that even though there are now options for consumers in terms of

a telecom operator, the current industry still shares many characteristics of a monopoly and

thus will still be considered to be a monopoly. As previously discussed in the introduction,

even though the introduction of du in the UAE has technically ended Etisalat’s monopoly

there is still a lack of competition. Newly developed areas in the UAE are for the most part

only given the option of choosing du as their telecom operator, as Etisalat don’t operate in

these areas. Therefore rather than creating competition, this has simply created a division of

monopoly.

In order to prove this hypothesis, I will attempt to correlate the telecom operators

with characteristics of a monopoly, which are:

Profit Maximizer: The firm maximizes profits.

Price Maker: Decides the price of the good or product to be sold, but does so

by determining the quantity in order to demand the price desired by the firm.

High Barriers: Other sellers are unable to enter the market of the monopoly.

Single seller: In a monopoly, there is one seller of the good that produces all

the output. A single company serves the whole market; therefore, the

company is the same as the industry.

Price Discrimination: A monopolist can change the price and quality of the

product. The firm sells higher quantities, charging a lower price for the

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product, in a very elastic market and sells lower quantities, charging a higher

price, in a less elastic market.2

By comparing the telecommunications industry of the United Arab Emirates to the

characteristics above, I should be able to determine whether or not it should still be

considered a monopoly or an oligopoly.

In order to assess the extent to which the telecom market is a monopoly in the UAE I

will be outlining the assumptions and characteristics of various market structures. This will

be used to compare the assumptions of different market structures to the market structure

of the industry in the UAE in order to assess the extent. Furthermore, I will be conducting

primary and secondary research. The primary research that will be conducted will be done

in the form of surveys. These surveys will be given to the parents of students at Dubai

American Academy, as the parents chose their telecom operator. For my secondary

research I will be finding data on the firms in question and the market in which they

operate.

2 Wikipedia. Wikimedia Foundation. Web. 25 Oct. 2014.

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Relevant Economic Theories

Ceteris paribus

Ceteris Paribus is an assumption that every factor other than the one being

discussed remains constant3. Every part of this essay is written on the basis of Ceteris

Paribus.

Various forms of market structure

In order to determine whether the telecommunications industry in the United Arab

Emirates is still a monopoly, or the structure of the market is now different, the

characteristics of different market structures must be explored in order to determine where

the industry falls.

Figure 14 shows the number of firms in a specific market structure and how contestable the market is.

3 "Ceteris Paribus Definition | Investopedia." Investopedia. Web. 25 Oct. 2014.

4 "Biz/ed - Market Structure | Biz/ed." Biz/ed - Market Structure | Biz/ed. Web. 25 Oct. 2014.

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1) Monopoly

Firstly, the assumptions and characteristics of a monopoly market structure will

be observed.

The first assumption of the monopoly market structure is that there is only one

firm producing the product so the firm is the industry. Another assumption is that there

are barriers to entry, which stop new firms from entering the industry and maintains

the monopoly. A third assumption of a monopoly is that as a consequence of the

barriers to entry the monopolist may be able to make abnormal profit in the long run5.

The characteristics of a monopoly, previously stated in the hypothesis, also help

to determine if an industry is a monopoly. These characteristics were that the firm is a

profit-maximizing firm, they are price makers, as opposed to price takers, there are high

barriers to entry, there is a single seller, and finally there is price discrimination.

While these assumptions and characteristics form the basis for whether or not

an industry is a monopoly, the market structure of the industry ultimately depends on

how narrowly we define the industry. For example, if there is only one supermarket in

the area that you live and there is no other way to obtain your groceries, then that

supermarket holds monopoly power in the area. However, when you expand the area,

then there are more supermarkets and more ways to obtain your groceries, and

therefore the supermarket loses its monopoly power.

5 Blink, Jocelyn, and Ian Dorton. Economics: Course Companion. Oxford: Oxford UP, 2007. Print.

8

Figure 26 shows the diagram of a monopolistic market

Figure 2 illustrates the demand curve facing a monopolist. Due to the monopolist

being the industry, you can see that both the monopolist and the industry have

downward sloping demand curves. This means that the monopolist can either control

the level of output or the price, however they cannot control both. This does not mean

they can charge whatever price they want though. As figure 2 illustrates a monopolist

will be producing at the output level where marginal cost is equal to marginal revenue

(MC=MR). In turn you can see the potential abnormal profits earned by the monopolist.

2) Assumptions of an oligopoly

The next market structure, based on the number of firms, is oligopoly. An

oligopolistic market is one in which there are a few firms that dominate the market. It is not

necessarily dependent on the number of firms in the market, but rather the market share of

6 "Price and Output under a Pure Monopoly." Monopoly. Web. 25 Oct. 2014.

9

the top firms in that market. This can be determined through using the concentration ratio

formula, which will be used later on in the essay. In most examples of oligopolistic markets,

there are distinct barriers to entry. This is due to the fact often there will be a small number

of firms having the majority of the market share. However, in some oligopolistic markets the

barriers to entry may be low, and therefore making it easier for a firm to enter the market.

An oligopolistic market however, is usually determined by price rigidity. The prices in an

oligopolistic market very rarely change.

There are two types of oligopolies: collusive and non-collusive. Collusive oligopoly

happens when the firms in the industry collude and charge consumers the same prices for

the product. Therefore the firms act as a monopoly and divide up any monopoly profits that

may be made. There are two types of collusion: Formal and tacit. Formal collusion is when

the agreement is open, while tacit is when the agreement is a secret. However, due to

formal agreements being illegal in most countries around the world, they tend to be tacit.

3) Assumptions of a monopolistic market

The third market structure possible in an industry is monopolistic competition. This

market structure, like the others, has several assumptions that help to determine whether a

firm is monopolistically competitive.

The first assumption of this market structure is that the industry is made up of a

fairly large number of firms. These firms are small, relative to the size of the industry. Due to

the firms being relatively small, they are not able to have a large effect on the industry as a

whole, as they make a very small part of it. Another assumption is that all firms produce

slightly differentiated products. By producing differentiated products, a consumer will be

able to tell a difference between the products of one firm to another. The last assumption is

that firms are completely free to enter or leave the industry. For the market structure there

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are no barriers to entry, therefore making it easy for a new firm to come in or for a firm to

leave7.

Figure 38 shows a firm making abnormal profit in the short run in a monopolistically competitive market

Figure 48 shows the long run equilibrium in a monopolistically competitive market

7 Blink, Jocelyn, and Ian Dorton. Economics: Course Companion. Oxford: Oxford UP, 2007. Print.8 "Monopolistic Competition." Monopolistic Competition. Web. 25 Oct. 2014.

11

In a monopolistically competitive market, firms will be able to make abnormal profits

in the short-run, shown in figure 3. Firms may also be making a loss in the short-run.

However, due to the nature of the market, which allows free entry and exit due to no

barriers to entry, there is long run equilibrium in the market, shown in Figure 4. Therefore in

the long run all firms will be able to make normal profits.

4) Assumptions of perfect competition market

The final market structure to be examined is a perfectly competitive market.

The first assumption of a perfectly competitive market is that there are many sellers. Each

seller produces a low share of the total output of the market and can therefore not

influence the market price. The second assumption is that there are many individual buyers,

who don’t have any control over the market price. There are also no barriers to entry or exit

from the industry. The firms will face no sunk costs. However, this also means that in the

long run, all firms will make normal profits. Another assumption of a perfectly competitive

market is that all products are homogenous. This means that firms are price takers and face

a perfectly elastic demand curve for their goods and services. Another assumption is that

consumers and producers have perfect knowledge of the industry. This means that the

consumers will know of all prices and products and also all sellers will have perfect

knowledge of their competitors. The final assumption is that factors of production are

mobile, meaning that land, labour, and capital can be altered in a response to the market

conditions changing.

The following table illustrates characteristics of the different market

structures.

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Table 19

Characteristic Perfect Competition Oligopoly Monopoly Contestable

Market

Number of firms

Many Few dominant firms

One with pure monopolyEffective duopoly in many cases

Many

Type of product

Homogenous Differentiated Limited Differentiated

Barriers to entry

None High High Low entry and exit costs

Supernormal short run profit

ü ü ü Any profit possible

Supernormal long run profit

û ü ü Supernormal invites hit and run entry

Pricing power

Price taker (passive)

Price maker but interdependent behavior

Price maker – constrained by demand curve and possible regulation

Price maker – but actual and potential competition limits pricing power

Non price competition

û ü (important) ü ü (important)

Economic efficiency

High Low allocative but scale economies and innovation

Low allocative but economies of scale and reinvested profits.Risk of X-inefficiency due to lack of competition

High – depending on strength of contestability

Innovative Behaviour

Weak Very strong Potentially strong Strong

9 "Market Structure Summary." Market Structure Summary. Web. 25 Oct. 2014.

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Data Collection and Analysis

Before beginning the research into the telecommunications market in the UAE, I will

provide a brief oversight into what will be covered in the research and the aim of that

research, in terms of how it will help me to verify my hypothesis. First of all, I will be looking

at the size and number of firms, as this is one of the key aspects in determining the market

structure. After that I will be looking at the ways of competition. By this, I refer to the way in

which the firms within the industry will be competing against one another in order to gain

market share and maximize profits. Lastly I will be looking at the barriers to entry into the

telecommunications market in the UAE.

Number and size of firms in industry

As previously mentioned in the essay already, there are two firms in the market.

These two firms are: Etisalat and du. Etisalat was the first telecom operator in the UAE and

held a monopoly for many years before du was founded, in an attempt to end the monopoly

that Etisalat had on the telecommunications market. The years in which Etisalat were a

monopoly in the UAE, they were able to acquire market share and a large customer base, as

the population of the UAE grew rapidly due to the vast amounts of foreigners coming into

the country for business purposes. When du was founded they faced the struggle of being

able to take customers away from Etisalat, who were well established at this point.

Market share refers to a company's portion of sales within the entire market in

which it operates. In order to calculate market share, the typical approach is to divide a

company’s total sales revenue by the market’s total sales revenue. However, due to

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Etisalat’s multinational status, it is more difficult to calculate. Etisalat’s revenue for 2012 was

in the region of AED 32.9 billion, while du’s revenue for 2012 was estimated to be AED 10.17

billion. However, du only operated in the United Arab Emirates while Etisalat operates

throughout the Middle East and gulf region.

54%

46%

Telecommunications Market Share UAE

Etisalatdu

Figure 5 shows the market share of firms in the telecommunications mobile phone industry

in the UAE.

Due to the inability to calculate Etisalat’s total market sales solely in the UAE, I must

go by already pre-established figures. Etisalat is estimated to have roughly a 54% market

share in the UAE in the telecommunications industry for mobile phones, leaving du with an

estimated 46% market share. This market share, which is almost shared equally, suggests

that the telecom industry for mobile phones in the UAE is not in fact a monopoly, as du has

been competing with Etisalat for customers and have almost half of the subscribers in the

UAE. However, as the telecommunications industry covers more than just the mobile phone

service, this is not an adequate distinction yet.

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Furthermore, in order to determine the market structure of an industry, one has to

look at the concentration ratio. Concentration ratios range from 0 to 100 percent. The levels

reach from no, low or medium to high to "total" concentration. This can be expressed

through the formula CRm= Σmi=1 si.. 0% means perfect competition or at the very

least monopolistic competition, while 100% means an extremely concentrated oligopoly and

if for example CR1= 100%, there is a monopoly. Looking at the telecom market in the UAE,

one can see that it has a high concentration as the two top, and only, firms have 100%

market share. This concentration ratio puts the telecom industry into the oligopoly and

monopoly range, and therefore does not further distinguish whether the industry is a

monopoly or an oligopoly.

Since I was unable to find information about the market share of

telecommunications industry through secondary research, a survey was conducted in order

to gain data. This survey is observed in appendix A. This survey revealed an almost equal

split of market share between the two firms. Etisalat held the slight majority as 57% of the

people that responded to the survey stated that Etisalat was their telecom operator, while

the other 43% stated that their telecom operator was du. However, due to the relative small

sample size of 42 people that responded, this information cannot be regarded as 100%

accurate. However it does give an idea that market share is split almost evenly between the

two firms, suggesting a degree of competitiveness.

Methods of competition

The methods of competition refer to the way in which firms compete in a market.

There are two ways in which firms can compete: price competition and non-price

competition.

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One way to determine whether firms are engaging in price competition or non-price

competition is through looking at firms’ profit margins. Firms with higher profit margins are

more likely to engaging in non-price competition, and vice versa, firms with lower profit

margins are more likely to be engaging in price competition. This is due to the fact that if

firms are engaging in price competition, then they will keep lowering their prices, thus

resulting in the profit margins being reduced.

Through looking at the financial data provided by both companies, you are able to

see profit margins. In 2012, du had revenue of AED 10.17 billion. Their profit during that

year was just under AED 2 billion. In that same year, Etisalat had revenue of AED 32.9 billion,

while their profit was AED 13.2 billion.

This numbers reveal that du had a profit margin of ±19% while Etisalat had a profit

margin of ±40%. These numbers are hard to relate to each other due to Etisalat having

expanded into other countries whereas du remains a local firm. However, both these profit

margins can be considered high relative to other telecom industries around the world. This

suggests that du and Etisalat do not engage in any price competition, as they are both able

to retain high profit margins.

Therefore this suggests that these two firms are more likely to be engaging in non-

price competition. This refers to the way in which the firms differentiate their products from

one another. By looking at the products on offer by each firm and the characteristics of

these products you are able to see that both firms offer very similar products for very similar

prices. In table 2, these characteristics are demonstrated for each firm.

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Table 2

Characteristics

Etisalat Variety of packages for different products

Only operate in certain areas and do not

offer their services in certain regions

du Available in newly developed areas of the

UAE mainly

Variety of packages for different products

In order to get more information about the non-price competition between these

firms, a survey was conducted, seen in appendix B. This survey revealed that 91% of people

did not have a choice between telecom operator, 6% said they had a choice between the

between the two firms and chose based on the price/service being offered, while the

remaining people that answered the survey were unsure. From these results I’m able to see

that these firms do not compete very much as they offer their services in different areas.

This makes it a monopoly as people in certain areas only have the choice of one operator.

Barriers to entry

Barriers to entry refer to the obstacles that make it difficult for a firm to enter a

given market. The telecommunications industry is typically one with very high barriers to

entry. As previously mentioned, monopolies have very high barriers to entry making it

(almost) impossible for new firms to enter the market.

First of all, one of the biggest barriers to entry in the telecom industry is finance.

Firms need to cover high fixed costs, and therefore require a lot of cash. Second of all, firms

18

also need to obtain a license to be able to operate and provide a service. This is a particular

high barrier of entry in the UAE.

In order to become a telecom operator firm in the UAE, a firm needs to obtain a

license from the UAE Telecommunications Supreme Committee. This is extremely difficult to

obtain as proven by the fact that only one firm so far has been granted a license, du, which

at the time was owned 40% by the government that had assigned the Supreme Committee

the task of liberalization in the telecommunication infrastructure market.

These extremely high barriers of entry are reminiscent of a monopoly, as it makes it

seemingly impossible to enter the market.

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Conclusion

Through this essay I have looked to answer the research question: To what extent is

the telecommunications market in the UAE a monopoly? In order to determine whether or

not it was a monopoly, I attempted to compare the industry to the characteristics of a

monopoly. This was done through looking at various aspects of a monopoly. I hypothesized

that although there had been an introduction of a new firm in the telecommunications

market, it is still considered to be a monopoly due to the characteristics shared.

First of all, I looked at the number and size of firms in the industry. Through looking

at this aspect, I determined that there are two firms in the market that have the entire

market share. While this was relatively simple to determine, I was also able to discover the

market share each firm had within the mobile phone telecom industry. This suggested a

level of competitiveness, as du had been able to gain market share from Etisalat, and they

were almost at an equal level, despite du only being founded just under a decade ago.

Furthermore, by then calculating the concentration ratio, I was able to discover that it had a

high ratio, a characteristic of an oligopolistic market structure or a monopoly.

Secondly I looked at the way in which these two firms compete in the market. I

learned through looking at their profit margins that these firms did not engage in price

competition, as both of them were able to post relatively high profit margins. After that I

discovered the way in which these two firms differentiate their products. This suggested

that although the competition was limited, they did engage in non-price competition. This

was confirmed in the primary research gathered through surveys, where most people

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confirmed that their decision on telecom operator was mostly based on location and

availability.

Lastly I looked at the barriers of entry a firm faces in the telecommunications market

in the UAE. By researching this I discovered the extremely high barriers to entry, as the

government made it very difficult to obtain a license to operate such a firm in the country.

This suggested that the market is a monopoly, as it prevents new firms from entering.

In order to develop a definitive answer to the research question posed in the

introduction to this essay, it is necessary to refer back to the characteristics of a monopoly

explained earlier on. First of all, you can assume the firm is a profit maximize due to their

high profit margins. The second characteristic states that they are price makers. Both firms

have almost like for like prices, and therefore you can assume that they are price makers, as

neither try to undercut each other. The next characteristic states that there are very high

barriers to entry in the industry. This is true of the market, as the government prevents new

firms from entering. The next characteristic states that there is a single seller. This is both

true and false. It is false in the sense that there are two firms selling the products in the

market. However, it is also true due to the fact that the firms operate in different regions

and therefore are not entirely in direct competition with each other. Through the

examination of these characteristics and the research completed in order to inspect various

aspects of the industry, it is my opinion that I have verified my hypothesis, and that the

telecommunications market in the UAE is still a monopoly.

21

Works Cited

Baumol, William J., and Alan S. Blinder. Economics, Principles, and Policy. New York: Harcourt Brace Jovanovich, 1979. Print.

Blink, Jocelyn, and Ian Dorton. Economics: Course Companion. Oxford: Oxford UP, 2007.

Print.

Du | Emirates Integrated Telecommunications Company. Web. 25 Oct. 2014.

<http://www.du.ae/>.

"Emirates Integrated Telecommunications Company." Wikipedia. Wikimedia Foundation, 24 Oct. 2014. Web. 25 Oct. 2014. <http://en.wikipedia.org/wiki/Emirates_Integrated_Telecommunications_Company>.

Etisalat. Web. 25 Oct. 2014. <http://www.etisalat.ae/en/index.jsp>.

"Etisalat." Wikipedia. Wikimedia Foundation, 24 Oct. 2014. Web. 25 Oct. 2014. <http://en.wikipedia.org/wiki/Etisalat>.

"Market Structure Summary." Market Structure Summary.

Http://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.html.

Web. 25 Oct. 2014.

"Online Glossary of Research Economics." Online Glossary of Research Economics. Web. 25 Oct. 2014. <http://econterms.com/>.

22

Appendices

Appendix A

Student SurveyQuestions and results

Participant details: 42

1. Who is your telecommunications operator?a. Etisalatb. du

No. of people Percentage (%) of total people surveyed

Etisalat 24 57.1%du 18 42.8%

Appendix B

Student surveyQuestions and results

Participant details: 34

1. Who is your telecommunications operator?a. Etislatb. du

No. of people Percentage (%) of total people surveyed

Etisalat 18 52.9%du 16 47%

2. What was the reason for you choosing your telecom operator?a. Availabilityb. Price/servicec. Unsure

No. of people Percentage (%) of total people surveyed

Availability 31 91.1%

23

Price/service 2 5.9%Unsure 1 2.9%

24