Competition and innovation: The diffusion of mobile telecommunications in Central and Eastern Europe

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Abstract

The paper unravels the determinants of the diffusion of mobile telecommunications in Central and Eastern Europe. About 20% of the population will adopt mobile telecommunications. The diffusion speed is faster in countries that have adopted mobile telecommunications late, implying a pattern of convergence in the diffusion levels. The speed of diffusion increases with the number of firms. Simultaneous entry is more effective than sequential entry in accelerating the diffusion speed. Diffusion speed increases with the size of the fixed telecommunications network and the length of the waiting list. Policy recommendations derived from these results permit to further qualify popular views on the sector.

Introduction

This study takes a closer look at the market for mobile telecommunications in Central and Eastern Europe (CEE). Particular emphasis is placed on the role of competition in the development of a new market. Mobile telecommunications are diffusing rapidly in the region. Several explanations can be given for this (Schenk et al., 1995): substitution effects due to the dismal performance of the fixed telecommunications network, long waiting lists for fixed line connections and better customer care services by mobile telecommunications operators. A systematic investigation into the determinants of diffusion of mobile telecommunications in CEE has not been done yet. The issues are however becoming important as these countries are due to join the European Union and the cost of accession depends strongly on the state of economic advancement of the accession candidates. The findings of this study will be related to those of a similar study on mobile telecommunications in the European Union (Gruber and Verboven, 2000).

The relationship between competition and diffusion is particularly emphasised in the economic literature on the diffusion of innovations: in many circumstances increasing the number of firms leads to faster diffusion of innovations (see for instance Reinganum, 1989). For many decades the design of market structure in the telecommunications industry used to rely on the natural monopoly argument. For mobile telecommunications it was already weak from the outset and has become completely untenable with the switch from analogue to digital transmission technology (Calhoun, 1988). This innovation has greatly increased the efficiency of the radio spectrum utilisation and therefore widened the market size in terms of potential number of subscribers that can be served by the network. Moreover, with the increased market potential a larger number of suppliers could be justified in the industry. The causal chain would therefore run as follows: technological progress supports a larger number of firms in the market, competition in the market is increased and the speed of diffusion of mobile telecommunications technology accelerates as well. The aim of this paper is to unravel these mechanisms for CEE countries.

These topics under investigation are also of relevance for policy makers and some recommendations can be derived from the results. The aspects of competition, new entry and diffusion have also attracted considerable interest from multilateral development finance institutions (World Bank, 1994, EBRD, 1997). In their mission of removing bottlenecks for economic development, they are often faced with the issue of finding the most effective way of providing communication infrastructure for which there is huge excess demand. The traditional fixed telecommunications firms are very difficult, slow and costly to reform, and have therefore limited capacity to raise capital for investments. Mobile telecommunications are seen as a convenient alternative to provide rapidly telecommunications services under competitive market conditions and the sector is very effective in attracting private capital (World Bank, 1998).

This study is arranged as follows. Section 2 describes the situation of the telecommunications sector in CEE in the first half of the 1990s. Section 3 presents some background information to give an understanding of the technological and regulatory environment for mobile telecommunications in general. In section 4 the CEE mobile telecommunications sector is presented in detail. Section 5 is a statistical analysis of the main determinants for the diffusion of mobile telecommunications in the CEE region. Section 6 presents the results. Section 7 discusses some policy implications from the findings. Section 8 draws the conclusions.

Section snippets

The legacy of the past for telecommunications in CEE

The telecommunications sector was penalised in centrally planned economies because of an ideological bias that gave predominance to material production and neglected services (Carbajo and Fries, 1997). The economic importance of the telecommunications sector is much smaller in CEE than in Western European countries. The contribution of telecommunications to total GDP is just over 1% in the case of the Czech Republic and Hungary, and it is below that in the other countries of the region. By

Background to mobile telecommunications technology

Mobile telecommunications is subject to very rapid technological change, especially in the transmission technology (Calhoun, 1988). Technological innovation is driven by the efforts to exploit as efficiently as possible the very scarce resource of the sector: spectrum. In the very early stages of the industry, the exploitation of the spectrum was so low that only relatively few customers could use it in a given geographical area. The so-called first generation analogue systems used portions of

Mobile telecommunications in CEE

As mentioned, each CEE country decided to have only one firm for running analogue mobile telecommunications services, treating the market as a natural monopoly. The mobile telecommunications firm was typically majority owned by the incumbent fixed line monopolist. Sometimes a foreign minority shareholder was accepted, mainly with the aim of transfer of technological and managerial knowledge.

The prices charged by analogue mobile telecommunications operators were high (Schenk et al., 1995) and,

The diffusion model

Like all innovations, mobile telecommunications are not immediately adopted by all potential subscribers. The adoption decision takes time. Various alternative diffusion models have been used to describe this process. This paper adopts so-called “epidemic” diffusion models5, where the diffusion of the new technology thus follows an S-shaped function.

More specifically, let yit denote the number of agents that have

Discussion of results

The logistic diffusion model is estimated using non-linear least squares, after adding an error term to , . Regression 1 in Table 2 shows the parameter estimates of the logistic function. The number of potential adopters is estimated at 17% of the total population. This turns out to be a quite robust estimate with different specifications of the logistic model. Only for the Gompertz model considerably higher parameter values are estimated, as will be seen later, but they are not significant.

Policy implications

The emergence of mobile telecommunications has had a very strong impact on the evolution of the telecommunications sector as a whole. Mobile telecommunications has not only challenged the natural monopoly paradigm previously predominant in the sector, it has also changed the perception of the role of private investment. The following briefly discusses the implications of the empirical results in this context.

Anecdotal evidence is reported that mobile telecommunications has been used as an

Conclusions

The aim of this study was to unravel the main determinants of the diffusion of mobile telecommunications in CEE countries. The empirical results suggest that about 20% of the population will adopt a mobile telephone. There is a substantial variety of diffusion patterns across countries, but countries adopting late seem to proceed quicker and therefore a trend to convergence in diffusion across countries could be established. Further important findings concern market structure. Passing from

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