Classroom Companion: Business

13.3 · Formation of Oligopolies

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traffic from the mobile network operators and reselling it to their own customers at 
a lower price than the network operator. Another category of competitors is mobile 
virtual network operators (MVNOs) owning some infrastructure such as subscrip-
tion and location management databases and gateway exchanges but leasing radio 
access infrastructure from ordinary mobile network operators. The mobile market 
is not big enough to support many operators of different types so that mobile tele-
communications within a country has become an oligopoly.
There are several reasons why mobile communications is an oligopoly market. 
The most important (and often overlooked) reason is that the frequency spectrum 
allocated to mobile communications is rather narrow and can only be sliced into a 
rather small number of slots broad enough to support a single operator. This then 
limits the number of operators that can build their own network in a region or 
country. Each mobile network operator must then be granted a license for using a 
particular slice of the available spectrum.
The second reason why there are so few mobile network operators is that it is 
expensive to build and manage mobile network infrastructures, in particular, since 
the licensing authorities may require that the network cover a certain percentage of 
the population (e.g., everyone) and not just the most profitable parts of the coun-
try. Resellers and MVNOs require only small capital investments and are easier to 
establish, and the mobile network operators are forced by government regulations 
to let them buy bulk traffic or lease infrastructure to affordable prices, thereby 
enhancing competition.
Streaming services are serving two markets: the provider of information to be 
streamed and the receiver of the streamed content. In music streaming, there are a 
few big providers, where Spotify, Apple Music, and SoundCloud are the most 
prominent. These providers are, on the oligopsony side, trying to capture artists 
and record labels on exclusive contracts and, on the oligopoly side, trying to cap-
ture listeners using different business models. This includes offering a combination 
of freemium and premium services (Spotify), creating communities of artists and 
listeners (SoundCloud), and offering access to a vast library of songs (Apple 
Music).
The competition between oligopolies is difficult because decisions made by one 
stakeholder may have direct impact on prices, competition, and market shares and, 
thus, changing the market composition entirely. One particular problem is that the 
competitors may fall into the prisoner’s dilemma trap. The prisoner’s dilemma is 
one of the most studied games in game theory (See the Wikipedia articles on 
“Game theory” and “Prisoner’s dilemma” for more details). The payoff matrix for 
the prisoner’s dilemma game for a duopoly is illustrated in 
.
Fig. 
13.3
. There are 
two competitors, firm A and firm B, competing for the same customers. Both firms 
know that the other firm is likely to lower the price to attract customers from its 
competitor. The decision each firm is facing is then either to keep the price 
unchanged or lower the price. The pros and cons for this decision are summarized 
in the payoff matrix as shown in figure.
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If the two firms do not change the price, the situation remains unchanged.
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If firm A decides to lower the price, then firm A may gain so many customers 
from firm B that its revenue becomes larger than it was before, while the reve-