ANALYSIS OF THE UNION OF MOBILE PHONES WITH GSM OPERATORS IN TURKEY

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ANALYSIS OF THE UNION OF MOBILE

PHONES WITH GSM OPERATORS IN

TURKEY

BİLKENT UNIVERSTIY

ECON 433 – INDUSTRIAL ECONOMICS

By Ayşegül Taşöz 20901279

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I. Introduction

In Turkey, there is a new market created by the agreement between mobile phone companies and

gsm operator companies. For instance, Turkcell is offering Samsung Galaxy III with 69 TL for

usage of gsm and 72 TL additional fee for mobile phone (http://www.turkcell. com.tr/ bireysel/

kampanyalar/ Sayfalar/Samsung-Galaxy-S3Kampanyasi.aspx). This type of product

differentiation strategies which involve price discrimination are based on two methods. One of

them consists of offering different versions of the same basic product, the other one is based on

the marketing different products in a bundle or in a tie-in sales. In terms of firms, the basic

motive is again increasing profits since with product differentiation which takes account of the

different preferences and tastes of consumers, firms can expand its market. For instance, with

bundling different products, firm can extend its market power to another market. The most

popular example about this subject is Microsoft and Internet Explorer case. As known Microsoft

has a monopoly power in the operating systems market and extend the power to net browser

market by selling Microsoft with Internet Explorer. Tie-in sales is little different than bundling

since in tie-in sales, there is no restriction about the quantity of the one good. The most popular

example in this subject is printer and ink cartridges since whenever a printer of specific brand is

bought, this guarantees the usage of this brand ink cartridge. For instance, Hewlett- Packard

cartridges do not fit Canon printers. In other words, if the HP printer was bought, the HP ink

cartridges would be bought.

The agreement between mobile phone companies and gsm operators is closer to the bundling

strategy since whenever a person bought a mobile phone through the gsm operator company, the

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person promises to pay a specific amount to the company for usage of the gsm operator, too. This

strategy also can be thought as a product differentiation strategy, since the same phone with an

additional package can be sold at a different prices and the difference in the prices is not only

caused by the difference in the cost. This difference can be caused of vertical agreement like

agreement between retailer and manufacturer. However, in this price scheduling, buying a

specific mobile phone can be seen as a signal by gsm operators since there are some different

packages for different phones and generally expensive phones come up with an expensive gsm

operator package. In this case with differentiating mobile phone depends on whether it has a

contract with a gsm operator or not and gsm operators take a signal from consumers about their

type.

II. Market Analysis and Price Discrimination in Turkish Mobile Market and The Turkish

Smart Mobile Phone Market

Price strategies which has been benefited in the new market, is created by the gsm operators and

mobile phone companies. In order to evaluate the new market, firstly, the creators of the market

should be evaluated. In Turkey, the market for mobile phones and gsm operators are evolving.

The first mobile operator was Turkcell which has started to provide this service in 1994

(Boynudelik, 9). “ Bilgi Teknolojileri ve İletişim Kurumu” published a report in third quarter of

the 2012, as of November 2012, three operators Turkcell, Vodafone and Avea have market shares

of 52.34%, 30 % and 19.66% respectively (47). The Herfindahl - Hirschman Index (HHI) is

commonly used measure of market concentration. It is formulated as follows:

HHI = 10,000 [Σ(Si)² ] = 10,000 [(S1) ² + (S2) ² + (S3) ² + … + (Sn) ²]

n = number of firms participating in an industry; Si = each firm’s market share

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HHI calculated for Turkish mobile market is:

HHI = 10.000 * [(0.5234)² + (0.30)² + (0.1966)²] = 4025.991

According to US laws, markets with HHI value greater than 2500 are classified as being highly

concentrated markets (http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf, 2010, p.19). In

this case, Turkish mobile market is a highly concentrated market. This imperfect competition

may be caused by the large economies to scales since in this industry, there are huge fix costs to

set up the business while marginal cost is very low. Additionally, if the market is highly

concentrated then it means that firms have a power on determining the market prices so using

some price strategies can increase the profits and change the market structure. There is no exact

causality relation between the market structure and price strategies. In other words, either the

market structure affects the price strategies or the price strategies may shape the market structure.

Both of them may trigger off the other one.

One of the most used pricing strategies in gsm operation market is price discrimination and it is

known as charging different prices for same product to different consumers or to different

demand types. This difference in prices is not caused only by the cost difference in the product. It

is accepted that the differences in prices is designed for extracting the consumer surplus from

consumers which have different demand for the same good. In other words, it can be expressed as

differentiating in willingness to pay of consumers provides an opportunity to firms to charge

different prices.

Actually, different types of demands don’t directly allow to price discrimination, in order to be

able to charge different prices, a firm also has to market power which means the ability to charge

a higher price than marginal cost of the product. The basic requirement of price discrimination

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exists in the gsm operation market however, in order to distinguish the customers who are

different than the other type of customers, firm should know the exact willingness to pay of

customers. In the reality, this is not possible so in gsm operation market, firms are generally

offering a sophisticated price schedule as a method of second degree price discrimination.

Therefore, firms are choosing to create some price schedule designed for extracting consumer

surplus of different type of consumers, and consumers can choose the package which is seem

more proper to themselves. In general case, both packages offer different usage rights with a

different prices. The key point is that the prices are differentiated not because of the increase in

the cost since in the gsm operator services there is not a significant marginal cost. Therefore, it

can be said that the firm charge prices to customers according to their valuation and demand.

Strategy is based on offering different packages can be seen in the whole gsm market. All of

Turkcell, Vodafone and Avea are benefiting from this strategy, their campaigns are very similar.

In this case, price strategies would not shape the market structure. There is already few firms with

market power and because of the competition between these markets all of them are using similar

strategies and Turkcell keeps its first mover advantage in the market. The market power is most

probably occurred because of large economies to scale in this industry.

However, most dramatic change occurred in the mobile phone market, Nokia was a leader in the

market and was benefiting from the first mover advantage but Nokia could not sustain this

position in the smart phone market since according to one of the recent reports, Nokia has 15.8%,

Apple has 19.0% and Samsung has 19.9% of the smart phone market (“Strategy Analytics”). The

smart mobile phone market reflects imperfect competition because even C4 ratio which normally

includes the market share of the 4 leader companies is only including shares of three companies.

In other words, C4 ratio equals 100% and this market is far away from perfectly competitive

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market. As known, basic price strategy in this market is based on product differentiation.

Actually, the product differentiation is based on horizontal product differentiation in this market

and there are a lot of models produced by the one brand and offer little differences in the product

and having different prices for small differences in preferences. This strategy can be seen as

similar to the strategies of linear location model.

However, as stated earlier, mobile phone market was changed, the leader firm Nokia did not

sustain its leader position. Different than the gsm market, prices strategies has shaped the market

structure in the mobile phone market.

III. New Market with Data Analysis

Different evolving processes in gsm operations market and mobile phone market affect the

market which includes both of them. Actually, the market which consists of the agreement

between mobile phone and gsm operators is based on a price strategy. In order to show the

current strategies of the new market, there are some data collected from offerings of Turkcell,

Vodafone and Avea.

GSM OPERATOR NAME AVEA TURKCELL VODAFONE

BRAND

NAME MODEL PACKAGE TOTAL PACKAGE TOTAL PACKAGE TOTAL

Samsung

Galaxy S III 78 1872 72 1728 79 1896

Galaxy S III 68 1632 68 1632 59 1416

Galaxy S III 34 816 60 1440 29 696

Samsung

Galaxy Note II 85 2040 119 2856 81 1944

Galaxy Note II 78 1872 69 1656 69 1656

Galaxy Note II 57 1368 59 1416 39 936

Samsung

Galaxy S III

Mini 40 960 - - 41 984

Galaxy S III

Mini 33 792 - - 25 600

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Galaxy S III

Mini 9 216 - - 5 120

Samsung

Galaxy Ace 20 480 27 648 21 504

Galaxy Ace 13 312 23 552 15 360

Galaxy Ace 13 312 14 336 5 120

Apple

Iphone 4S 16

gb 155 3720 153 3672 81 1944

Iphone 4S 16

gb 115 2760 143 3432 79 1896

Iphone 4S 16

gb - - 98 2352 51 1224

Apple

Iphone 4 8 gb 131 3144 90 2160 72 1728

Iphone 4 8 gb 95 2280 83 1992 69 1656

Iphone 4 8 gb - - 73 1752 49 1176

Apple

Iphone 3G S - - - - 28 672

Iphone 3G S - - - - 17 408

Iphone 3G S - - - - 14 336

Nokia

Asha 311 14 336 - - - -

Asha 311 8 192 - - - -

Asha 311 1 24 - - - -

Nokia

603 25 600 44 1056 21 504

603 19 456 37 888 15 360

603 12 288 34 816 9 216

Nokia

Asha 201 - - - - 13 312

Asha 201 - - - - 9 216

Asha 201 - - - - 1 24

Nokia

Lumia 920 - - 95 2280 - -

Lumia 920 - - 69 1656 - -

Lumia 920 - - 59 1416 - -

*Data is collected from

(http://www.turkcell.com.tr/bireysel/cihazlar/Sayfalar/ceptelefonlari/genel.aspx)

http://www.avea.com.tr/web/KonusMesajlas/Kampanyalar/Faturali/Cihaz

http://cepmerkezi.vodafone.com.tr/kampanyalar/cihazlar#plantype=PAYM&PP_c

hildoption=anadditionmonthlytariff

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This table represents the three gsm operator companies and their different campaigns for specific

mobile phones. The model of each mobile phone model was chosen according to their recent

most popular models. In “package” column, the extra amount paid in a month for the mobile

phone was represented. There are at least two or three package campaigns exist for each

companies. Each package differs from their promises given about the usage of gsm operator. As

it is seen previous parts, gsm operator companies already are benefiting from price discrimination

by offering different packages. Additionally, in each package the payment for the mobile phone

differs. The “total” column represents the total payment for the mobile phone, and it consists of

24 months period payments.

In order to show the existence of the price discrimination, the marginal costs should be known;

however, in this case accessing these private knowledge is not possible. Hence the price offered

by technological markets for mobile phones would be taken as base group to reflect the market

prices. In Turkey, there are some leaders in technological markets such as Teknosa, Electroworld

and Bimeks and they have 44%, 15% and 8.6% market shares respectively

(http://yatirimciekrani.blogspot.com). There is not perfectly competitive market so these firms

may offer different prices for the same product, in order to be objective, the market prices would

be taken as the average of these firms’ offerings. In the second table, technological markets’

offerings and average offers are shown for each mobile phone model used in the previous table,

these prices are for cash payment not for 24 months period payments as did in the previous table.

BRAND NAME MODEL Teknosa Bimeks Electro

World AVERAGE

Samsung Galaxy S III 2000 1700 1550 1750

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Samsung Galaxy Note II 1900 1900 1800 1866.667

Samsung Galaxy S III

Mini 1000 1000 1000 1000

Samsung Galaxy Ace 650 570 600 606.6667

Apple Iphone 4S 16

gb 2000 1800 1900 1900

Apple Iphone 4 8 gb - - 1400 1400

Apple Iphone 3G S 850 - - 850

Nokia Asha 311 400 370 400 390

Nokia 603 600 500 550 550

Nokia Asha 201 - 260 300 280

Nokia Lumia 920 - 1700 - 1700

*Data is collected from

http://www.teknosa.com/index/

http://www.bimeks.com.tr/

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http://www.electroworld.com.tr/

Firstly, it can be understood that there are some offers for a specific mobile phone which is

coming with a gsm package. All of the gsm companies have benefited from three or two different

gsm packages which consist of different fix amount usage rights for gsm operations. Each price

list about usage of gsm operator gives different prices to the same phone. For instance, Avea

offers Samsung Galaxy III, with three packages which consists of 78, 68 and 34 TL payment for

a month. Offering different package for a same phone is benefit of gsm companies. In this way,

they can charge different prices to different consumers which have different willingness to pay

with a second degree price discrimination. Second observation is that when the phone does not

have a gsm package, its prices are always higher. The only difference in this case is promise to

the gsm operator for a fix payment about the usage of this gsm operator. Therefore, it can be said

that this strategy can be evaluated as bundling and product differentiation with price

discrimination.

As stated earlier, the gsm operators are already benefiting from second degree price

discrimination with different price schedules; however, in this new market their basic strategy

also consists of third degree price discrimination, which is based on the charging price according

to the signal which is coming from the consumers demand elasticity. In this case, it can be said

that if a consumer wants to buy an expensive phone, it implies that this consumer has a higher

willingness to pay and less elastic demand. Therefore, if a person wants to buy an expensive

phone, the gsm package can be sold at a higher prices without any cost differentiation. In order to

support this statement, in the data, there are some similar price schedules for fixed amount gsm

usages and their only difference is based on whether they would be bought with a mobile phone

or not. The paid amount for mobile phone is changing with gsm operator package and it can be

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said that these gsm operators buy these mobile phones at a fixed price but reflecting the price to

consumers in a different price schedules. Actually, this is a discount for high quantity packages.

Generally a firm which offers different prices to different customers, should give some incentive

compatibility to prevent the high demand type of customers to choose a package which is

designed for low demand type of consumers. In this case, offering gsm operator usages with

mobile phones may lower this incentive compatibility and can take signals from the consumers

about their preferences on type of mobile phones.

Also it can be realized that there are same phones for high demand type consumers since all gsm

operators have some packages for these models such as Samsung Galaxy III and Iphone 4S.

However, there is a big variation across offerings for mobile phones targeted low demand type

consumers. As seen in the table most popular phones of Nokia are cheaper than its competitors,

therefore it can be said that Nokia is targeting low demand type of consumers with this price

strategy. Additionally, all gsm operators are offering different models of Nokia, the different

attitude can be explained by the non-stickiness of low demand type consumers in their

preferences.

As it is seen there are different packages which are designed both low demand type consumers

and high demand type consumers. Therefore, it can be said that only serving high type demand is

not a reasonable option for firms. It can be explained by the demonstration structure of Turkey

which has includes few high demand type than required level in which serving to only high type

of consumers is more profitable

For mobile phone companies, product differentiation with price discrimination can extend their

market. For Nokia which has lowest share in the smart mobile phone market, it is seen as Nokia

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is losing power in the productions designed for high type demand, with these agreement between

the gsm operators, it may try to hold low type demand consumers since it only uses these type of

campaigns for its cheaper products. As understood, product differentiation through gsm

companies is a leverage to the mobile phone firms; however, why the gsm companies start to do

this is not so clear at first insight. This price strategy has used in the US from past to todays. The

difference can be explained by the new agreements about the transferring of customers between

gsm companies. Currently this transferring process from one Gsm Company to another is very

easy and costless for the consumers. Therefore, with a long term contractual relation, gsm

operator firms try to stabilize their demands in a competitive market.

IV. Conclusion

The new market created by bundling of gsm operators and mobile phones benefit from some

price strategies like product differentiation with price discrimination and second degree price

discrimination and third degree price discrimination. Normally, all of these strategies affect the

market structure; however, in this case, market structure shapes the price strategies like using

same strategies by Samsung and Apple while Nokia is using very different strategy. As seen, the

price strategies in the new market can be explained by the recent situations in the gsm operator

and mobile phone market. Therefore, the new market is continuum of these two markets and is a

good mean to understand original markets.

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REFERENCES

Boynudelik , Uygar. "Analysis of Turkish Mobile Communication Market and Introduction of

Mobile Virtual Network Operators." MA Thesis. İstanbul Bilgi Unıversity, 2011.Web.<http:

//www.prepaidmvno.com/wp-content/uploads/2011/05/56573698-Analysis-of-Turkish-

Mobile Communications-Market-and-Introduction-of-Mobile-Virtual-Network-Operators.pdf>.

"Bilgi Teknolojileri ve İletişim Kurumu, Türkiye Elektronik Haberleşme Sektörü, Üç Aylık Pazar

Verileri Raporu 2012 Yılı 3. Çeyrek." November, 2012.<http://btk.gov.tr/kutuphane_ve_

veribankasi/pazar_verileri/ucaylik12_3.pdf>.

"Strategy Analytics: Apple Becomes World's Number One Smartphone Vendor in Q2

2011." Business Wire . N.p., 29 2011. Web. 7 Dec 2012. <http://www.businesswire.

com/news/home/20110728007223/en/Strategy-Analytics-Apple-Worlds-Number

Smartphone-Vendor>.

http://yatirimciekrani.blogspot.com/2012/05/teknosa-halka-arzinda-hisse-basina-7.html

http://yatirimciekrani.blogspot.com/p/sirket-raporlar-ve-sektor-raporlar.html

http://www.avea.com.tr/web/KonusMesajlas/Kampanyalar/Faturali/Cihaz

http://cepmerkezi.vodafone.com.tr/kampanyalar/cihazlar#plantype=PAYM&PP_childopti

on=anadditionmonthlytariff

http://www.bimeks.com.tr/

http://www.electroworld.com.tr/

http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf, 2010, p.19

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http://www.teknosa.com/index/

http://www.turkcell.com.tr/bireysel/cihazlar/Sayfalar/ceptelefonlari/genel.aspx)