Scale Economies on Wireless Telecommunications Industry
ARTICLE IN PRESS
Telecommunications Policy 33 (2009) 29–40
Contents lists available at ScienceDirect
Telecommunications Policy
URL: www.elsevierbusinessandmanagement.com/locate/telpol
Estimating scale economies of the wireless telecommunications industry using EVA data$
Changi Nam a, Youngsun Kwon a,Ã, Seongcheol Kim b, Hyeongjik Lee c a b c
School of IT Business, Information and Communications University, 119, Munjiro, Yuseong-gu, Daejon 305-732, Republic of Korea Associate Professor, School of Journalism and Mass Communication, Korea University, 5-1, Anam-dong, Seongbuk-gu, Seoul, 136-701, Republic of Korea Full-time instructor, Department of Management Science, Republic of Korea Naval Academy, 88-1 Angok-dong, Jinhae, Kyungnam, 645-797, Republic of Korea
a r t i c l e in fo
abstract
This paper proposes a new estimation method of total cost and average cost curves and applies it to the telecommunications industry. The method is more flexible and entails less hassle for data collection than traditional methods. The results show that the longrun average cost (LRAC) curve is downward sloping, revealing the presence of economies of scale in production. The two largest Korean mobile network operators are realizing full economies of scale, while the smallest operator is not. Finally, the paper recommends three policy alternatives that the Ministry of Information and Communication of Korea can draw on to increase efficiency in the Korean mobile telecommunications market. & 2008 Elsevier Ltd. All rights reserved.
Keywords: Scale economy estimation Economic value-added (EVA) Telecommunications Asymmetric regulation
1. Introduction Empirically estimating the long-run average cost (LRAC) curve and the minimum efficient scale (MES) of production has been an important research topic in the field of regulatory economics because data relating to both are critical for measuring production efficiency in industries, especially in public utility variants.
Telecommunications Policy 33 (2009) 29–40
Contents lists available at ScienceDirect
Telecommunications Policy
URL: www.elsevierbusinessandmanagement.com/locate/telpol
Estimating scale economies of the wireless telecommunications industry using EVA data$
Changi Nam a, Youngsun Kwon a,Ã, Seongcheol Kim b, Hyeongjik Lee c a b c
School of IT Business, Information and Communications University, 119, Munjiro, Yuseong-gu, Daejon 305-732, Republic of Korea Associate Professor, School of Journalism and Mass Communication, Korea University, 5-1, Anam-dong, Seongbuk-gu, Seoul, 136-701, Republic of Korea Full-time instructor, Department of Management Science, Republic of Korea Naval Academy, 88-1 Angok-dong, Jinhae, Kyungnam, 645-797, Republic of Korea
a r t i c l e in fo
abstract
This paper proposes a new estimation method of total cost and average cost curves and applies it to the telecommunications industry. The method is more flexible and entails less hassle for data collection than traditional methods. The results show that the longrun average cost (LRAC) curve is downward sloping, revealing the presence of economies of scale in production. The two largest Korean mobile network operators are realizing full economies of scale, while the smallest operator is not. Finally, the paper recommends three policy alternatives that the Ministry of Information and Communication of Korea can draw on to increase efficiency in the Korean mobile telecommunications market. & 2008 Elsevier Ltd. All rights reserved.
Keywords: Scale economy estimation Economic value-added (EVA) Telecommunications Asymmetric regulation
1. Introduction Empirically estimating the long-run average cost (LRAC) curve and the minimum efficient scale (MES) of production has been an important research topic in the field of regulatory economics because data relating to both are critical for measuring production efficiency in industries, especially in public utility variants.
References: Asai, S. (2006). Scale economies and scope economies in the Japanese broadcasting market. Information Economics and Policy, 18(3), 321–331. Brynjolfsson, E., & Hitt, L. (2000). Beyond computation: Information technology, organizational transformation and business performance. Journal of Economic Perspectives, 14(4), 23–48. Brynjolfsson, E., & Hitt, L. (2003). Computing productivity: Firm-level evidence. Review of Economics and Statistics, 85(4), 793–808. Carlton, D. W., & Perloff, J. M. (2000). Modern industrial organization (3rd ed). New York: Addison Wesley Longman. Considine, T. J. (1999). Economies of scale and asset values in power production. Electricity Journal, 12(10), 37–42. Fare, R., & Logan, J. (1983). The rate-of-return regulated firm: Cost and production duality. Bell Journal of Economics, 14(2), 405–414. Huettner, D. A. (1973). Shifts of long run average cost curves: Theoretical and managerial implications. Omega, 1(4), 421–450. Katrishen, F., & Scordis, N. A. (1998). Economies of scale in services: A study of multinational insurers. Journal of International Business Studies, 29(2), 305–323. Kelly, T., & Woodall, M. (2000). Telecom traffic indicators. Telecommunications Policy, 24(2), 155–159. Kim, Y. (2006). The impact of cellular-spectrum expansion on the structure and performance of mobile telecom market. Korea Telecommunications Policy Review, 13(1), 1–25 (in Korean). Kramer, J. K., & Pushner, G. (1997). An empirical analysis of economic value added as a proxy for market value added. Financial Practice and Education, 7, 41–49. Lovata, L. M., & Costigan, M. L. (2002). Empirical analysis of adopters of economic value added. Management Accounting Research, 13, 215–558. ¨ Lorincz, S. (2006). Cost structure and complementarity in US Telecommunications, 1989–1999. Information Economics and Policy, 18(3), 285–302. Nemoto, J., & Asai, S. (2002). Scale economies, technical change and productive growth in Japanese local telecommunications services. Japan and the World Economy, 14(3), 305–320. Ofcom. (2003). Fixed narrowband retail services market: Identification and analysis of markets, determination of market power and setting SMP conditions. Explanatory Statement and Notification. Park, J., Kwon, Y., & Park, M. (2005). Membership card promotion vs. price reduction in the mobile telephony market. In 2005 Korea management information system international conference, Seoul, Korea (in Korean). Peitz, M. (2005a). Asymmetric access price regulation in telecommunications markets. European Economic Review, 49, 341–358. Peitz, M. (2005b). Asymmetric regulation of access and price discrimination in telecommunications. Journal of Regulatory Economics, 28(3), 327–343. Perrucci, A., & Cimatoribus, M. (1997). Competition, convergence and asymmetry in telecommunications regulation. Telecommunications Policy, 21(6), 493–512. Sung, N., & Gort, M. (2000). Economies of scale and natural monopoly in the US local telephone industry. Review of Economics and Statistics, 82(4), 694–697. Weaver, S. C. (2001). Measuring economic value added: A survey of the practices of EVA proponents. Journal of Applied Finance, 11, 7–17. Whitwell, G. J., Lukas, B. A., & Hill, P. (2007). Stock analysts’ assessments of the shareholder value of intangible assets. Journal of Business Research, 60(1), 84–90. Willig, R. D. (1979). Multiproduct technology and market structure. American Economic Review, 69(2), 346–351. Young, D. (1997). Economic value added: A primer for European managers. European Management Journal, 15(4), 335–343.