Oligopoly: Competition among the Few

Transcription

1 King Fahd University of Petroleum and Minerals College of Industrial Management Department of Finance and Economics ECON 511: Managerial Economics Oligopoly: Competition among the Few Mohammed Husein 1

2 Table of Contents Table of Contents... 2 I. Introduction... 3 II. Oligopoly... 3 III. Supply Curve... 4 IV. Oligopoly and the Game Theory... 5 V. Bertrand s Oligopoly... 6 Calculating the Classic Bertrand Model...6 VI. Cournot Oligopoly... 8 Cournot Duopoly Equilibrium...9 VII. Stackelberg Leadership Model A. Unperceived Interdependence...12 B. Perceived Interdependence (Price Leadership) Every Firm a Follower Every Firm a Price Leader One Firm is a Price Leader...15 C. Models of Price Leadership Barometric Price Leadership Dominant Firm and Competitive Fringe Collusive Price Leadership...17 D. Applications of Stackelberg Model Leader Follower Model Leader Leader model...19 VIII. References

3 I. Introduction An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion. This paper discussed Oligopoly market structure and its models with more concentration on the stackelberg model with examples from real life. II. Oligopoly Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may collude to raise prices and restrict production in the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership. In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and didn't compete directly with each other. The welfare analysis of oligopolies suffers, thus, from sensitivity to the exact specifications used to define the market's structure. In particular, the level of deadweight loss is hard to measure. The study of product differentiation indicates oligopolies might also create excessive levels of differentiation in order to stifle competition. 3

4 III. Supply Curve In an oligopoly, firms operate under imperfect competition and a kinked demand curve which reflects inelasticity below market price and elasticity above market price, the product or service firms offer, are differentiated and barriers to entry are strong. Following from the fierce price competitiveness created by this sticky upward demand curve, firms utilize non price competition in order to accrue greater revenue and market share. "Kinked" demand curves are similar to traditional demand curves, as they are downwardsloping. They are distinguished by a hypothesized convex bend with a discontinuity at the bend the "kink." Therefore, the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve. Classical economic theory assumes that a profit maximizing producer with some market power (either due to oligopoly or monopolistic competition) will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upward sloping marginal cost curve and a downward sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve, marginal costs could change without necessarily changing the price or quantity. The motivation behind this kink is the idea that in an oligopolistic or monopolistically competitive market, firms will not raise their prices because even a small price increase will lose many customers. However, even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. The curve is therefore more price elastic for price increases and less so for price decreases. Firms will often enter the industry in the long run. Figure 1: Oligopoly Demand Curve 4

5 IV. Oligopoly and the Game Theory Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies. Game theory is a branch of applied mathematics that is used in the social sciences (most notably economics), biology, political science, computer science, and philosophy. Game theory attempts to mathematically capture behavior in strategic situations, in which an individual's success in making choices depends on the choices of others. While initially developed to analyze competitions in which one individual does better at another's expense (zero sum games), it has been expanded to treat a wide class of interactions, which are classified according to several criteria. Traditional applications of game theory attempt to find equilibriums in these games sets of strategies in which individuals are unlikely to change their behavior. Many equilibrium concepts have been developed (most famously the Nash equilibrium1) in an attempt to capture this idea. These equilibrium concepts are motivated differently depending on the field of application, although they often overlap or coincide. This methodology is not without criticism, and debates continue over the appropriateness of particular equilibrium concepts, the appropriateness of equilibriums altogether, and the usefulness of mathematical models more generally. One way of categorizing the Game theory is to categorize the games as simultaneous or sequential. Simultaneous games are games where both players move simultaneously, or if they do not move simultaneously, the later players are unaware of the earlier players' actions (making them effectively simultaneous). Sequential games (or dynamic games) are games where later players have some knowledge about earlier actions. This need not be perfect information about every action of earlier players; it might be very little knowledge. For instance, a player may know that an earlier player did not perform one particular action, while he does not know which of the other available actions the first player actually performed. The difference between simultaneous and sequential games is captured in the different representations discussed above. Often, normal form is used to represent simultaneous games, and extensive form is used to represent sequential ones; although this isn't a strict rule in a technical sense. There are three models of the oligopoly theories that make use of the games theory: 1. Bertrand's oligopoly. In this model the firms simultaneously choose prices 1 The Nash equilibrium (named after John Forbes Nash, who proposed it) is a solution concept of a game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his or her own strategy (i.e., by changing unilaterally). 5

6 2. Cournot's duopoly. In this model the firms simultaneously choose quantities 3. Stackelberg's duopoly. In this model the firms move sequentially V. Bertrand s Oligopoly Bertrand oligopoly is a model of price competition between duopoly firms which results in each charging the price that would be charged under perfect competition, known as marginal cost pricing. The model has the following assumptions: There are at least two firms producing homogeneous products; Firms do not cooperate; Firms have the same marginal cost (MC); Marginal cost is constant; Demand is linear; Firms compete in price, and choose their respective prices simultaneously; There is strategic behavior by both firms; Both firms compete solely on price and then supply the quantity demanded; Consumers buy everything from the cheaper firm or half at each, if the price is equal. Competing in price means that firms can easily change the quantity they supply, but once they have chosen a certain price, it is very hard, if not impossible, to change it. Some examples of firms that might operate in this way are bars, shops or other companies that publish nonnegotiable prices. Calculating the Classic Bertrand Model Firm 1 s optimum price depends on what it believes firm 2 will set prices at. Pricing just below the other firm will obtain full market demand (D), while maximizing profits. If firm 1 expects firm 2 to price below marginal cost, then its best strategy is to price higher, at marginal cost. In general terms, firm 1 s best response function is p1 (p2) where p1 and p2 are the two firms price levels respectively, this gives firm 1 optimal price for each price set by firm 2. 6

7 Figure 2 shows firm 1 s reaction function p1 (p2), with each firms strategy on each axis. It shows that when P2 is less than marginal cost (firm 2 pricing below MC) firm 1 prices at marginal cost, p1=mc. When firm 2 prices above MC but below monopoly prices, then firm 1 prices just below firm 2. When firm 2 prices above monopoly prices (PM) firm 1 prices at monopoly level, p1=pm. Figure 2: firm 1 s reaction function p1 (p2) under Bertrand Oligopoly Because firm 2 has the same marginal cost as firm 1, its reaction function is symmetrical with respect to the 45 degree line. Figure 3 shows both reaction functions. Figure 3: Reaction functions of two firms under Bertrand Oligopoly The result of the firms strategies is a Nash equilibrium, that is, a pair of strategies (prices in this case) where neither firm can increase profits by unilaterally changing price. This is given by the intersection of the reaction curves, Point N on the diagram. At this point p1=p1 (p2), and p2=p2 (p1). As you can see, point N on the diagram is where both firms are pricing at marginal cost. 7

8 Another way of thinking about it, a simpler way, is to imagine if both firms set equal prices above marginal cost, firms would get half the market at a higher than MC price. However, by lowering prices just slightly, a firm could gain the whole market, so both firms are tempted to lower prices as much as they can. It would be irrational to price below marginal cost, because the firm would make a loss. Therefore, both firms will lower prices until they reach the MC limit. There are two plausible outcomes: colluding to charge the monopoly price and supplying one half of the market each, or not colluding and charging marginal cost, which is the noncooperative Nash equilibrium outcome. If one firm has lower average cost (a superior production technology), it will charge the highest price that is lower than the average cost of the other one (i.e. a price just below the lowest price the other firm can manage) and take all the business. This is known as "limit pricing". VI. Cournot Oligopoly Cournot oligopoly is an economic model used to describe industry structure. It has the following features: There is more than one firm and all firms produce a homogeneous product; Firms do not cooperate; Firms have market power; The number of firms is fixed; Firms compete in quantities, and choose quantities simultaneously; There is strategic behavior by the firms. An essential assumption of this model is that each firm aims to maximize profits, based on the expectation that its own output decision will not have an effect on the decisions of its rivals. Price is a commonly known decreasing function of total output. All firms know N, the total number of firms in the market, and take the output of the others as given. Each firm has a cost function ci(qi). Normally the cost functions are treated as common knowledge. The cost functions may be the same or different among firms. The market price is set at a level such that 8

9 demand equals the total quantity produced by all firms. Each firm takes the quantity set by its competitors as a given, evaluates its residual demand, and then behaves as a monopoly. Cournot Duopoly Equilibrium This section presents an analysis of the model with 2 firms and constant marginal cost. p1 = firm 1 price, p2 = firm 2 price q1 = firm 1 quantity, q2 = firm 2 quantity c = marginal cost, identical for both firms Equilibrium prices will be: p 1 = p 2 = P(q 1 + q 2 ) This implies that firm 1 s profit is given by Π1 = q1(p(q1 + q2) c) Calculate firm 1 s residual demand: Suppose firm 1 believes firm 2 is producing quantity q 2. What is firm 1's optimal quantity? Consider the figure 4. If firm 1 decides not to produce anything, then price is given by p(0 + q 2 ) = P(q 2 ). If firm 1 produces q 1 ' then price is given by p(q 1 ' + q 2 ). More generally, for each quantity that firm 1 might decide to set, price is given by the curve d 1 (q 2 ). The curve d 1 (q 2 ) is called firm 1 s residual demand; it gives all possible combinations of firm 1 s quantity and price for a given value of q 2. Figure 4: firm 1 s residual demand under Cournot oligopoly Determine firm 1 s optimum output: To do this we must find where marginal revenue equals marginal cost. Marginal cost (c) is assumed to be constant. Marginal revenue is a curve r 1 (q 1 ) with twice the slope of d 1 (q 2 ) and with the same vertical intercept. The point at which the two curves (c and r 1 (q 2 )) intersect corresponds to quantity q 1 ''(q 2 ). 9

10 Firm 1 s optimum q 1 ''(q 2 ), depends on what it believes firm 2 is doing. To find equilibrium, we derive firm 1 s optimum for other possible values of q 2. Figure 5 considers two possible values of q 2. If q 2 = 0, then the first firm's residual demand is effectively the market demand, d 1 (0) = D. The optimal solution is for firm 1 to choose the monopoly quantity; q 1 ''(0) = q m (q m is monopoly quantity). If firm 2 were to choose the quantity corresponding to perfect competition, q 2 = q c such that P(q c ) = c, then firm 1 s optimum would be to produce nil: q 1 ''(q c ) = 0. This is the point at which marginal cost intercepts the marginal revenue corresponding to d 1 (q c ). Figure 5: firm 1 s optimum output under Cournot oligopoly It can be shown that, given the linear demand and constant marginal cost, the function q 1 ''(q 2 ) is also linear. Because we have two points, we can draw the entire function q 1 ''(q 2 ), see Figure 6. Note the axis of the graphs has changed, The function q 1 ''(q 2 ) is firm 1 s reaction function, it gives firm 1 s optimal choice for each possible choice by firm 2. In other words, it gives firm 1 s choice given what it believes firm 2 is doing. Figure 6: firm 1 s reaction function under Cournot oligopoly 10

11 The last stage in finding the Cournot equilibrium is to find firm 2 s reaction function. In this case it is symmetrical to firm 1 s as they have the same cost function. The equilibrium is the interception point of the reaction curves. See Figure 7. Figure 7: Cournot equilibrium The prediction of the model is that the firms will choose Nash equilibrium output levels. This model implies that: Output is greater with Cournot duopoly than monopoly, but lower than perfect competition. Price is lower with Cournot duopoly than monopoly, but not as low as with perfect competition. According to this model the firms have an incentive to form a cartel, effectively turning the Cournot model into a Monopoly. However cartels are usually illegal, so firms have some motive to tacitly collude using self imposing strategies to reduce output, which (ceteras paribus) raises price and thus increases profits. VII. Stackelberg Leadership Model The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. In game theory terms, the players of this game are a leader and a follower and they compete on quantity. The Stackelberg leader is sometimes referred to as the Market Leader. There are some further constraints upon the sustaining of Stackelberg equilibrium. The leader must know ex ante that the follower observes his action. The follower must have no means of 11

12 committing to a future non Stackelberg follower action and the leader must know this. Indeed, if the 'follower' could commit to a Stackelberg leader action and the 'leader' knew this; the leader's best response would be to play a Stackelberg follower action. Firms may engage in Stackelberg competition if one has some sort of advantage enabling it to move first. More generally, the leader must have commitment power. Moving observably first is the most obvious means of commitment: once the leader has made its move, it cannot undo it it is committed to that action. Moving first may be possible if the leader was the incumbent monopoly of the industry and the follower is a new entrant. Holding excess capacity is another means of commitment. Stackelberg model utilizes the ISO profit curves. Prices charged by firm 1 and firm 2 are measured on horizontal and vertical axes respectively. A. Unperceived Interdependence The simplistic approach to the interdependency problem among oligopolists is merely to ignore it; that is, for a firm to act as if it does not exist at all and assumes that competitors will do likewise. For example, let us assume Firm A enters first and charges the monopoly price PA1 yielding profit A4. When B enters, it will set price at PB1. As a result, A reduces its price to PA2 which leads B to PB2. This process continues until both arrive at E which is a point of stable equilibrium. The Stackelberg analysis in this case is similar to Bertrand Solution. B s Price Figure 8: Equilibrium under Stackelberg Unperceived interdependence model 12

13 B. Perceived Interdependence (Price Leadership) Price leadership is an observation made of oligopolic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. In the long run price leadership could have a negative impact on the dominant firm. Over time, as the supply from the fringe (smaller) competitors in the market increases the residual demand of the dominant firm decreases. In such a scenario, if the dominant firm intends to continue as the price leader in the market, it can do so only at the cost of decreasing its supply to the market, consequently sacrificing its market share. Unheeded to, the gradual loss in market share could see the once dominant player lose its position of dominance in the market. One can determine three cases regarding the price leadership model: 1. Every firm a follower 2. Every firm a leader 3. One firm is price leader 1. Every Firm a Follower If every firm wants to be a follower and not a leader, the result may be the same as unperceived interdependence, i.e. the solution is the same as in the Bertrand case. For example, suppose Firm B is the first firm set rice at BP. Firm A will respond with price AP. But Firm B does not want to be a leader but prefers to be a follower and it will lower its price to BP 1. A also prefers to be a follower and responds with price AP 1. This process finishes at point I, that is the point of intersections of the reaction curves of both firms. Since this is the Bertrand Solution, point I represents a stable equilibrium. This case would be as the Cournot solution if the variable had been quantity. This case is shown in the following figure: 13

14 Figure 9: Equilibrium when both are follower 2. Every Firm a Price Leader Assume Firm A is the first to try price leadership. It sets its price at AP since this price maximizes its profit contingent on Firm B s expected response of price BP. Firm B, however, refuses to accept A leadership. Firm B sets its own price at BP. But A is not willing to follow B. The reaction curves are not followed. The equilibrium will be neither at k (Firm A choice) nor at J (Firm B s choice). It may be at I which will be preferable to both. Point I may or may not be a point of stable equilibrium. If it lies in the contract curve, it will be stable. If not, further attempts at price leadership on the part of both firms or some type of agreement can be expected to bring the firms to a contract curve solution. The importance of this analysis is that contested price leadership works towards a stable equi/solution. 14

15 B s Price Figure 10: Equilibrium when every Firm is a price leader 3. One Firm is a Price Leader A requirement of successful price leadership is that the member firms accept the decisions of the leader firm. Even though one firm is the leader, its actions must be conditioned by what the other firms will accept. The reaction curves provide the evidence of acceptability. Suppose Firm A set its price at AP0. Whatever profit that price will yield is contingent upon B s reaction. Owing to the limitations that B s reaction imposes on A, the highest profit A can make setting price at AP0 is A1. A will move along RBR B until A reaches its highest possible profit curve. Once price leadership arrangement has been established, Firm A can move to point g on B s reaction curve raising its profit to A2. A s price becomes AP1 and B s price BP1 and it also makes higher profit. The greater profit that A s rivals will permit it to make is A3. By raising price to AP, A will move along RBR B to point t at which B s reaction curve is tangent to the iso profit curve A3. Presumably, Firm A would prefer to be at point U on A4 but the reaction of its rival precludes the attainment of that point and limits A to profit A3. The profit level A3is A s maximum consistent with the constraints imposed on it by the reaction of its follower. This solution is stable. 15

16 Figure 11: Equilibrium when A is a price leader C. Models of Price Leadership 1. Barometric Price Leadership This version postulates that the price leader is a firm that responds more quickly than its rivals to changing cost and demand conditions, but does not in itself have significant market power. In such circumstances the price leader acts, in effect, as a barometer of market conditions for the rest of the industry, with its price levels set close to those that would emerge even under competition. Barometric price leadership may be indicated by a number of market characteristics, for example occasional switching between firms in the role of price leader; the occurrence of upward price leadership only in response to increased industry costs or demand; occasional and sometimes substantial time lags in the price response of follower firms; and occasional rejection by the rest of the market of price changes initiated by the price leader. 2. Dominant Firm and Competitive Fringe Other models characterize price leadership in terms of industries where the distribution of firm sizes is highly skewed, resulting in a dominant firm that exists alongside a competitive fringe of much smaller firms, typically supplying a relatively standardized product. The fringe suppliers are small individually but may have a significant share of the market collectively. The dominant firm sets its own price on the basis of industry demand not served by the fringe suppliers, 16

17 thereby providing a price umbrella for the latter. Market performance then depends on relative costs and ease of market entry. If there are barriers to market entry, the dominant firm will be able to charge supra competitive prices, though this power will be moderated by the presence in the industry of the competitive fringe. Since it acts as price setter, the dominant firm s price cuts will be matched by the competitive fringe. On the other hand, if barriers to entry are low, the price leader s ability to exercise market power will be constrained by the entry (or threat of entry) of additional fringe suppliers. 3. Collusive Price Leadership Early static models of oligopoly suggested that attempts to coordinate pricing would often break down, because of the incentives facing an individual firm to deviate from the agreement. The idea was that individual firms would often face too strong an incentive to cheat by selling additional output at the higher (collusive) price, thereby leading to the breakdown of the collusive pricing policy. Coordination of pricing was viewed as likely to be feasible only in industries that are highly oligopolistic, where products are close substitutes, where barriers to entry exist, and where firms face similar cost conditions (making it easier to detect cheating). However, it is likely that collusive price leadership can only be understood properly in a dynamic context. More recent work, much of it based on game theoretic foundations, examines the conditions under which pricing behavior may be collusive when firms are viewed as taking decisions over a number of time periods, in contrast to the single period approach of earlier static models. A flavor of the approach is given by Rotemberg and Saloner.1 They observe that the barometric and dominant firm models are often inappropriate for industries in which there are a number of more or less equally sized players selling differentiated products. In such industries one would expect at least some degree of strategic behavior. They model a form of oligopolistic competition in which price announcements by one firm are quickly matched by competitors, pricing behavior that they argue is typical of many industries. In choosing whether to follow the leader s price change, the follower trades off the expected one off gains from deviating from the price matching policy against the losses it would incur were the leader to revert to noncooperative behavior (i.e. a permanent price war). They show that collusive behavior can be sustained in a repeated game provided that the threat of reversion to non cooperative behavior is credible. The following features emerge from their analysis. The model attempts to predict which firm will be the price leader. Given the presence of differentiated products, each firm will face different cost and demand conditions and therefore 17

18 have different preferences in terms of the (matching) price level. Other things being equal, the firm that acts as price leader is likely to obtain greater profits from the pricing strategy than the firm that assumes the role of follower. However, if one firm possesses superior information about demand, then the less informed firm may find it profitable not to take on the price leadership role. Some degree of price stickiness, though not completely rigid pricing, would be expected to emerge from the price leadership regime. The price leader has an incentive to changes prices in response to shifts in relative demands for the two products and in response to changes in its own costs. In so doing it can make profits at the expense of the follower. However, the price leader has to balance the gains from opportunistic price changes against the possibility that the follower will revert to non cooperative behavior if there are too many such changes. D. Applications of Stackelberg Model 1. Leader Follower Model In Saudi Arabia, there are many examples that follow the leader follower model. In dairy products, there are three to four dominant companies like Almarai, Al Safi and Nadic. On the other hand, there are so many small dairy companies such as Najdiah and Nada. For example, Nada dairy company follows Almarai as the largest dairy company in Saudi Arabia. Almarai Company PJSC, one of the largest integrated dairy companies in the Middle East, was founded in Operating early on through a network of small decentralized farms and processing plants, Almarai embarked in the 90 s on a restructuring plan both to centralize and improve cost efficiency. From an initial focus on the processing of fresh milk and laban, Almarai diversified overtime to include in its product portfolio a wide range of both fresh and long life dairy products, cheese, butter, fruit juices, non dairy products (tomato paste, jam), as well as bakery products. Almarai operates in all GCC countries through 40 sales depots and a network of 350 trailers and 1,000 delivery vans, servicing 34,000 customers daily. The aggressive expansion in the number of livestock (more than 80,000 cows currently) has enabled it to effectively respond to increased dairy products demand across the GCC, pushing it to a market leadership position in the Saudi Arabian dairy market. It is also among the top three players in every other GCC country. 18

19 Nada on the other hand is a small firm located in the eastern province and does not have the power of Almarai. It follows Almarai strategies in everything. When Almarai lowers its price it does so and when the Almarai does the opposite it does that as well. Even when Almarai changes its packaging Nada chages its packaging following what Almarai does. Another example of leader follower model is the Kentucky Fried Chicken (KFC) and Al Baik restaurants in the western region of Saudi Arabia. KFC is the leader in other regions in KSA but this is not the case in the western region where Al Baik has the largest market share of the fried chicken market. To get a market share and stay in the market, KFC has no other choice rather to follow Al Baik strategies. Al Baik is known for its competitive prices and can set prices that force others to follow. 2. Leader Leader model This model can be seen in the competition between Saudi Telecommunications Company and its rival Mobily. STC has been the only mobile service provider in Saudi Arabia. But this is not the case anymore. Mobily is the trade name of Saudi Arabia's second Telecommunications Company, Etihad Etisalat consortium. The company, as the winning bidder for Saudi Arabia's second GSM license, provides mobile telecom services nationwide, breaking Saudi Telecom's monopoly in the wireless business. The company launched 3.5G services on the 27th of June The consortium is led by UAE firm Etisalat who owns 35%, with 45% held by 6 strategic local partners. The remaining 20% was put up for public subscription in an IPO that was massively oversubscribed. GSM Association has described Mobily as the fastest growing mobile operator in the Middle East & North Africa. "GSM Association Newsletter" September 2005 edition. In 2006, Mobily subscribers reached more than 4,800,000 subscribers. As of 20th January 2007, mobily got 6 million subscribers and 0.5 million 3G users. Also there is a big demand in Mobily Blackberry service, companies like SABB, Samba Financial Group, Saudi Pepsi Cola Co., etc are now using mobily Blackberry. From Sales distribution and expansions aspect, Mobily introduced in 2004 the first telecommunication franchise business model in the Gulf Region, the Fully Branded outlet (FBO), thus, assuring rapid and cost effective expansion of its network of outlets. Since Mobily was introduced in 2004, it adopted a solid expansion strategy, based on a direct and indirect sales channels. This strategy helped Mobily expand within a short span of time, has helped establish Mobily Brand throughout the Kingdom, and as a result also, has helped Mobily achieve its set target for the year 2006, both in terms of sales and revenue targets.. 19

20 The Success of the Last two years was achieved through the efforts of all Mobily s employees, including those of a very professional and ambitious sales team through its own Flagships, Fully Branded Outlets, Co Branded outlets, Kiosks and thousands of dealers, scattered throughout the kingdom, covering majority of the population. This network of outlets and dealers was a major factor of the rapid growth and Customer Acquisition, consequently, Mobily has earned a reasonable market share since the launch of its operations in May 25, Even with the successes of the past two years, the sales department continue to look to the future, with a strong commitment to continue to introduce new products and services as they are developed, through its current and future retail outlets, with a vision to make the Brand available ubiquitously, thus, making Mobily services easily accessible to more and more of the Kingdom s population. Mobily has launched a mobile push to talk service (PTT) under the brand name 'Mobily Hawwel' in Saudi Arabia. PTT service provides users with a different user experience to traditional voice, delivering a 'walkie talkie' style service only one person can talk at a time. However, it is not limited in distance as with normal walkie talkies, as the conversation is carried across the mobile GSM network, being offered on this technology for the first time in the kingdom. The service can provide a one to one or up to 10 people at the same time as a group calling, allowing a user to know who is online through small icons appearing with certain colours. Mobily said that the service will be available for post paid and pre paid subscribers at monthly fees. Mobily Hawwel conversations are encrypted over GPRS data or 3G network to avoid crosstalk or listening in. This will be accomplished with the execution of an ambitious expansion plans for its own network of flagships, as well as introducing a new cost effective franchise retail concept (Mini FBO). The new concept (Mini FBO) will complement the existing Mobily retail and channel partner outlets, and will cover more than 60 cities and towns, which will help achieve its targets, both in terms of sales and customer experience. Those outlets, as is the case with the Mobily flagships, will provide the full range of products and services to the current and future customers of Mobily. The full efforts of the sales team, as it relates to the ongoing expansion plan, will focus on achieving the targets set for the company, to lead all the GSM operators in Saudi Arabia and the 20

21 region, in terms of customers acquisition, service excellence and efficiency, taking advantage of Mobily s commitment to always deploy cutting edge technology and solutions to its customers. After Looking at Mobily strategy, the telecommunication market in KSA is no longer a monopoly. It is more of Oligopoly market. Each company tries to be the market leader. 21

22 VIII. References 1. Econ 510 course handouts