Market Forces or <i>Qian Gui Ze</i>? Interpreting Market Behavior in the Chinese Telecommunications Industry

Abstract

When it comes to a product market where competition is supposed to be among firms who share a single parent - a government agency as dominant shareholder, as is the case in China's telecommunication industry, standard economic theory offers little help in interpreting market behavior and its consequent market outcome. In China, economic liberalization with political constraint has led to distortions of market conduct, including deviation of firms from profit maximization and regulators from public interest. In the case of telecommunications, the incumbent operators, all of which are government-dominated SOEs, have demonstrated somewhat peculiar behaviors toward such arenas as price rivalry, infrastructure investment, network interconnection, and universal service obligations. These behaviors have proved to be pro-efficiency in some cases but anti-efficiency in many others. Despite the possible variance in underlying incentives, one common characteristic of these behaviors is that they all seem to be influenced by an law or Qian Gui Ze (QGZ) which is imbedded in the current socio-economic system. Unlike a regular system of rules and laws which are relatively easier to understand, this law is difficult to fathom. One way to address the issue may be to take a systematic institutional perspective. Based on previous work in this field, this paper tries to synthesize the unique institutional endowment which can have direct or indirect influence on the market conduct of Chinese telecom firms. A two-tiered analytical model is developed in this regard which integrates both explicit (formal) and implicit (informal) sides at both the economy and industry levels. Particular attention is paid to the evolution of the QGZ and its implications in interpreting market behavior as well as industry performance. Conclusions include that one-sided competition reform in China has not led and cannot lead to sustainable, genuine and meaningful competition in telecommunications in the absence of a self-enforcing formal mechanism of institutions and the development of a parallel market-oriented socio-cultural environment. Second, the current socio-cultural environment itself has been a direct consequence of the one-sided reform and improvement will not come before further movement in political reform. Finally, even if there is a level of competition, it is mostly neo-institutional competition, rather than neo-classic competition. In this sense, the mission of economic reform faced by China seems not merely to cease at neo-classic market reform, instead, China faces the challenge of neo-institutional market reform in which firms are to become real market players under a scientifically designed self-enforcing institutional environment.