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Price cuts help industry compete and flourish
2005-09-22
China Daily
Price cuts are always good news for consumers, but they may reduce the profit levels of enterprises. How should policy-makers choose between the pros and cons?
In the domestic telecom market, intensified competition has frequently forced service providers to cut prices to grab or even just maintain market shares.
This is what the rules of the game are according to economics textbooks. But former minister of information industry Wu Jichuan said in an article that recent "price wars" in the telecom industry are undesirable in terms of promoting competition.
Wu does not oppose rational price cuts, according to the article, but holds that operators should stop "unreasonable price wars." Otherwise they will suffer from the blind competition that will ensue.
Wu has been echoed by some experts who warn price wars will ultimately jeopardize the interests of consumers as bigger players squeeze their competitors out of the market and form a monopoly.
The views of those experts are, predictably, rejected by consumers, who claim price cuts are a normal means of market competition without which the industry will develop slowly and consumers will not enjoy the benefits of competition.
Price wars, or excessive price cuts regardless of costs, do affect operators' profits and may even fatally damage their prospects. On the other hand, price cuts benefit consumers and prompt competitors to develop new technologies, improve management efficiency and lower operational costs.
One must first clarify the relationship between price cuts and price wars to understand the fundamentals of the telecom industry. They concern not only consumer benefits but whether the industry can fare well in a free, competitive playing field where operators can use their best instrument - price or service quality - to prevail.
Price cuts do not always mean price wars. The reasoning of those who are opposed to so-called price wars is operators sell their services at a discounted price, which, they claim, is a form of "price war" that will incur financial losses. However, just mixing up the two terms, they have stopped short of providing persuasive financial figures to back up their argument.
In recent years, major Chinese operators have been cutting prices continually as monopolies lose their grip and competition intensifies. Their profit levels have not been on the decline, and even now still hover at a high level despite repeated price adjustments labelled "price wars" by some regulators and experts.
Last year, China Mobile, the largest mobile phones operator, registered a profit of 42 billion yuan (US$5.18 billion), up 18.1 per cent year on year. Telecom experts admit the sector as a whole still pockets excessive profits every year.
Therefore, price cuts are not blind moves. Operators are financially capable of offering cut-price services to compete with each other. In other words, their price adjustments can hardly be blamed for disrupting market order as a vicious price war does.
Such price fluctuations in accordance with changes in supply and demand are common in other market-based economies.
Of course, since the operators remain largely State-owned, it is understandable that some regulators and experts are cautious about endorsing price-based competition among telecom operators, which, they fear, may reduce the profits of those State-controlled enterprises and result in the loss of State assets. Opponents of price cuts have cited this concern as a weapon to safeguard the rigid telecom pricing regime.
Price cuts actually do not lead to real losses of State assets. The only result of the cuts is that the value of State assets can no longer appreciate as fast as it would if the sector was reaping excessive profits in a monopolized market. The appreciation rate is currently slowing down, but the sector is still profiting and it is not a loss of State assets in the real sense.
The telecom authorities have reformed the sector in recent years to introduce competition and benefit consumers. This has drawn widespread applause.
A result of this process is loosened price regulation. The latest telecom document, which was released by the Ministry of Information Industry and the National Development and Reform Commission and will take effect on October 1, only sets a ceiling price rate for operators. They are expected to further lower prices in a bid to gain the upper hand in market competition.
This is not doomsday for telecom operators. The best market players are always those who survive following competition.
Competition-based price cuts are not detrimental either to operators or consumers. They can force operators to improve efficiency and cut costs. With an expanded consumer group in the wake of price cuts, enterprises should see their pockets swell.
An example is the computer industry. As more people are using the convenient tool, competition among producers has been white hot and prices have slumped worldwide. While computers become more affordable for consumers, the sector has become ever more powerful.
As prices are cut, telecom regulators should focus mainly on two things. One is ensuring that as prices fall, operators do not cheat consumers by providing watered-down services.
Indeed, the fear of a fall in the quality of services has been cited by many to block price cuts.
The other is no operator should be allowed to adopt a low-priced strategy to monopolize the market and bully consumers. Regulators can play a role in both respects. It is their responsibility.
Price cuts in the telecom sector are no devil. Take it easy.
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