The Public Incumbent's Defeat in Mobile Competition: Implications for the Sequencing of Telecommunications Reform

Abstract

Within a mere five years of market competition, the mobile communications sector in Taiwan has exceeded a 100 percent penetration rate, currently ranking near the top of the world. In an even more stunning development, the public incumbent, Chunghwa Telecom, has handed the leadership status to a market entrant, Taiwan Cellular Corp., despite phenomenal mobile communications growth. This paper explores the factors that hamstrung Chunghwa Telecom in competition against its rival entrants. Our econometric analysis substantiates the fact that handset subsidies are the most effective instrument for mobile firms to gain market share. Chunghwa Telecom due to its public ownership status was nevertheless prohibited at first from adopting such a marketing strategy. The empirical results provided in this paper indeed pinpoint the importance of the sequencing of reform mandates in developing telecommunications: a prolonged privatization could help to promote competition in the industry. Public ownership makes Chunghwa Telecom vulnerable to political intervention and operational inefficiency, which is a barricade to performance and competitiveness for the not-yet-privatized company in a liberalized market. Taiwan's case sheds light on how to produce a better outcome for telecommunications: market reform should be carried out by liberalizing the market first and privatizing the public incumbent later.