Telecommunications Industry in the Era of Globalization with Special Reference to India

Abstract

Globalization opens up possibilities for gains in efficiency through international exchange based on the principle of comparative advantage. These gains are very significantly augmented with the development of communications system that reduces cost of negotiations, monitoring, and coordination. The advent of telegraph as a communication device in 1839 in Britain marked a signal change in this scenario of cost of communication.

Appendix

Telecommunications Bertrand model

Let us show the implication of the public and the private firm playing a game of price competition. In this mixed oligopoly framework, we maintain the assumption that the public firm (Y) is relatively inefficient compared to the private firm (X). We also maintain the assumption that the public firm maximizes social welfare.

Let the utility function of the representative consumer is

$$ U\; = \;x\, + \,y\, - \,\frac{1}{2}(x^{2} \, + \,2bxy\, + \,y^{2} ) $$

b represents the degree of substitutability. $b\; = \; \in (0,\,1)$

From the above utility function we get the following inverse demand functions

$$ \begin{gathered} p_{x} \; = \;1\, - \,x\, - \,by \hfill \\ p_{y} \; = \;1\, - \,bx\, - \,y \hfill \\ \end{gathered} $$

From the above we get direct demand function as under.

$$ x\; = \;\frac{{1\, - \,b\, + \,bp_{y} \, - \,p_{x} }}{{1 - b^{2} }},\;\;y\; = \;\frac{{1\, - \,b\, + \,bp_{x} \, - \,p_{y} }}{{1 - b^{2} }} $$

The private firm (X) has zero marginal cost and the public firm (Y) has a marginal cost of c. $1\, > \,c\, > \,0$.

c measures the degree of inefficiency of the public firm.

The public firm maximizes social welfare, which is a sum of consumer’s surplus and firms’ profit.

$$ \begin{gathered} SW\; = \;U\, - \,p_{x} x\, - \,p_{y} y\, + \,\pi_{x} \, + \,\pi_{y} \hfill \\ SW\; = \;x\, + \,y\, - \,\frac{{x^{2} \, + \,y^{2} }}{2}\, - \,bxy\, - \,cx \hfill \\ \end{gathered} $$

Replacing x and y from equation and finding out first-order condition of social welfare maximization by the public firm and profit maximization by the private fir we get the following optimum values.

$$ \begin{gathered} p^*_{y} \; = \;\frac{b(1\, - \,b)\, + \,2c}{{2\, - \,b^{2} }} \hfill \\ p^*_{x} \; = \;\frac{1\, - \,b\, + \,bc}{{2\, - \,b^{2} }} \hfill \\ y^*\; = \;\frac{1\, - \,b\, - \,c}{{1\, - \,b^{2} }} \hfill \\ x^*\; = \;\frac{1\, - \,b\, + \,bc}{{(1\, - \,b^{2} )(2\, - \,b^{2} )}} \hfill \\ \end{gathered} $$

The public firm will produce when inefficiency is not very large under the condition

$$ 1\, - \,b\; > \;c $$

If $1\, - \,b\; < \;c$, Bertrand competition leads to limit pricing equilibrium.

It is observed that if the inefficiency is zero, the public firm definitely charges a lower price. But if inefficiency rises the survival of the public firm will be at stake. In that case the private firm will prefer to get into price competition.

For a fuller treatment of comparison of Cournot and Bertrand models in mixed oligopoly see Ghosh and Mitra (2010) and Choi (2012).