Market Analysis of Mobile Handsets Subsidies

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Market Analysis of Mobile Handsets Subsidies
Fawzi Daoud, Heikki Hämmäinen Networking Laboratory Helsinki University of Technology P.O. Box 3000, FIN-02015 HUT, Finland {,

Abstract Subsidies are a widespread practice to allow consumers to get their mobile handsets at deep discount, or even for free. Recently, with 3G and subsequent requirements on sophisticated and costly handsets, subsidies are being reconsidered both in subsidized and non-subsidized markets. In this paper, we analyse the requirements for subsidies with respect to economic efficiency. Using a simplified analytical model with linear demand and supply we illustrate the relationship of subsidies with market factors such as penetration rate, churn rate, country type (developed/developing), and charging type (prepaid/postpaid). Korea, Japan, Finland, and the UK are chosen as case markets since they represent different strategies for handsets subsidies. Our main conclusion is that consumer subsidies, either government- or operator-funded, can be economically efficient from the national viewpoint when applied for faster adoption of a specific technology at the right time window in a temporary manner. Keywords Mobile handsets, mobile markets, elasticity, penetration 1 Definition of subsidies

There is no widely accepted definition of what constitutes a subsidy. However, according to the World Trade Organisation (WTO), a subsidy contains three elements: (i) a financial contribution (ii) by a government or any public body within the territory of a member (iii) which confers a benefit. Generally on the international level subsidies are thought of as cash payments from a government to a producer or consumer, but subsidies may appear in many formats (see Table 1). Some have a direct effect on price, like grants and tax exemptions, while others act indirectly, for example, through regulations that bias the market in favor of a government-sponsored technology. Form of Intervention Example

1. Direct Financial Transfer 2. Regulation of a sector 3. Trade restrictions 4. Preferential tax treatment

Grants to producer or consumers, low interest loans Demand guarantees, price controls, market access restrictions Quotas, trade embargoes, technical restrictions Rebates, exemptions on royalties, tax credit, accelerated depreciation Table 1. Types of Subsidies

1(18) ITS 2004, Berlin, Sep 4-7, 2004

The exact consequence of any government subsidy is dependent on the specific national circumstances to which it is applied. As the context and characteristics of the market system vary, so do the barriers and potential ways of overcoming these. Forms of possible market distortions include: • Subsidies reducing consumer prices may cut incentives to use products more efficiently; • Subsidies reducing producer costs may cut incentives to minimize costs, resulting in less efficient operation and investments; • By reducing the revenue received by producers, subsidies can undermine their ability and incentive to invest in new infrastructure; • Direct subsidies in the form of grants or tax exemptions act as a drain on government finances; • Price caps or ceilings below market-clearing levels may lead to physical shortages and a need for administratively costly rationing arrangements; • By increasing sales, consumption subsidies may increase import or decrease the amount available for export; and • Subsidies to a specific technology can undermine the development and commercialisation of other promising technologies. We are interested in handset subsidies granted by a government or operator and appearing to consumers as lower handset prices. 2 Case Markets

The market phase and government policy of our case markets are briefly summarized as follows. In Japan, cellular phone service was first introduced in 1979. In 1994, customer ownership of handsets was introduced, and subsidies for handsets have been general practice. In 1999,...
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