Research Paper on Safaricom: An In-Depth Economic Analysis of Kenya's Largest Mobile Service Provider

Introduction

Safaricom is the largest mobile service provider in Kenya, with an estimated customer base of about 26 million subscribers. The Multi-Billion Company was established in the year 1997 and was a fully retained subsidiary of Telkom Kenya. In mid-2000, Vodafone Group PLC of the United Kingdom bought 40% stake and administration obligation from the Company. The paper shall, therefore, do an in-depth economic analysis of Safaricom, its markets, and competitors.

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The primary market for Safaricom is all Kenyans who use mobile phones for their day to day activities. The Company targets both the youth and the elderly in their service provision and offers specialized packages based on the need and preferences of their target market. Besides, Safaricom not only targets individuals, but it also targets other public, private, and even government institutions as it strives to offer its services. Some of the main competitors of Safaricom are Telecommunication companies like; Airtel and Telkom. In the year 2000, Airtel was initially launched in Kenya as Kencell. It was later rebranded and called Zain in 2008, and then finally it was named Airtel in the year 2010. On the other hand, Telkom was founded in April 1999 as Kenya's leading telecommunication's operator. This was after the KPTC was split into Communication's Commission of Kenya (CCK), Telkom Kenya, and the Postal Corporation of Kenya (POSTA).

Being Kenya's biggest Telco, Safaricom has the largest market share of about 67 percent. Due to the significant market dominance, Safaricom abuses its power in all of its business sectors. The existence of barriers to entry has enabled Safaricom to enjoy most of the dominance it has in the Telco Industry. The first barrier to entry is resource ownership, and this is one of the most fundamental barriers to entry in any competitive market. Safaricom is the largest Telco Company has substantial control over the majority of inputs needed to produce their products and services. Thus, by limiting the ownership of these inputs, Safaricom has been able to restrict other firms from entering into this corresponding industry effectively.

Correspondingly, since the Government owns 35 percent of Safaricom, it does all it can to ensure that it protects the Company from other competitors. Research has proven that a Government is one of the primary sources of barriers to entry, through the creation of patents and copyrights. Nonetheless, these are not only the barriers to entry which are established by the Government. The Government is the key player in developing the rules of the game. As a result, the Government has the authority to determine who is eligible to participate or not participate in a particular market sector. It is also essential to understand that the Government may establish barriers through lawfully restraining the number of accomplices in a specific market. Other legal restrictions include charters or licenses that are intended to pursue other goals but also act as barriers. With this, it becomes impossible for anyone to join the Telco market.

The last barrier to entry is the startup cost. Entering an industry can be quite costly, and this, in most cases, acts as a restrictive factor (Piazzai & Wijnberg 2019). Over the years, Safaricom has been able to expand both in the aspect of human resources, as well as technological resources. Hence, for another company to enter the market and be impactful, it must have billions of resources, both financial and labor. Since most firms are unable to mobilize such funds, they will be unable to enter the market. This, therefore, creates a perfect barrier for companies which are in the Tech industry, thus ensuring low competition.

The general market structure of Kenya's Telco industry is an oligopoly market. In simple terms, an oligopoly is a market where a few large scale sellers control industry. Consequently, oligopolies translate to innumerable forms of collusions, and in most cases, it leads to increased prices for the consumers. Some of the basic features of an oligopoly market include:

Interdependence

Being one of the most critical elements of the oligopoly market, each seller has to be cautious whenever actions are taken by their rivals (Lamantia & Radi 2018). What it means is that if any company in the market changes their prices, all the other competitors within that industry will have no option but to comply, to remain in the competition. Banking organizations in Africa face various difficulties, including mind-boggling expense models and charges that make it unreasonably expensive for low-salary fragments, a high inclination for money over computerized exchanges, and an inclination towards cooperatives. In that capacity, Africa's retail-banking infiltration remains at a large portion of the worldwide normal for developing markets at 38% of the total national output. Safaricom and its rivals Airtel have taken the portable banking to the following level where it has changed lives radically.

Few sellers

Under this market structure, sellers are few, and the consumers are many. In Kenya, there are more than 30 million mobile subscribers and only three major mobile service providers. Thus, the few firms dominating the market will enjoy the privilege of price controls for the products. Oligopoly market structure exists in the media transmission industry in the mobile phone administration industry in Kenya. This case arises because every one of these ventures has a bunch of providers which offer the market. Because of this market control, these organizations can impact the whole market. Overwhelming business sector players can make barriers of entry for new participants; in this way, making it hard for them to get into the business.

Advertising and marketing

In the oligopoly market, all the firms do advertisements for their products and services regularly, intending to reach more customers and expand their customer base (Lamantia & Radi 2018). In most cases, advertising makes competition amongst such firms intense. Safaricom as well as its rivals do most of their advertisements through the use of social media platforms, TV, Newspapers, as well as through the use of Billboards. They have special offers which they tend to use to attract more customers to their networks.

Safaricom is one of the first-class organizations in Kenya that have been discharging well-known advertisements within recent memory. Safaricom, as a correspondence specialist co-op they have limited to the Kenyan people group by utilizing Kenyan tourist spots, Kenyan individuals, and the Kiswahili is the National language and the day by day exercises performed by Kenyans. Their crowd thinks that its simple to identify with their advert and has been working very well against their competitors.

Exit and entry barriers

In this type of market, firms may quickly exit the industry at will, but it faces significant obstacles when entering the market. Some of the challenges include; economies of scale, sophisticated technology, government licenses, high capital, and patent issues. Kenyan banks have been contending energetically to avert cell phone organizations, including Safaricom from taking part in the matter of cash move. These banks contended that cash moves were a safeguard of banks; accordingly, enabling cell phone suppliers to take part in them was disregarding the Banking Act. The cell phone suppliers are presently compelling government officials to prevent the banks from entering the versatile financial frameworks simply all alone. The obstructions to passage have, to a great extent, been disturbed by the political condition.

Competition

With few sellers in the market, the competition tends to be less intense. As a result, any mover made by the Company may have a substantial impact on its competitors. This makes all firms to stay ready and prepared with an appropriate counterattack. This is evident in the compelling rivalry between Safaricom and Airtel. Safaricom lost 1.6 percent of its share in the market in the quarterly report ending June as opponent Airtel added more clients to its system. This was the third straight quarterly drop for Kenya's greatest corporate giant, which had 29.7 million supporters during the period. The most recent controller results come at the scenery of a fight between rivals Airtel, Telekom, and Safaricom over cases that the telco is mishandling its predominance in a 2015 report before changing its tune.

Lack of uniformity

Firms in an oligopoly market structure differ in size, in that some are big while others are small. Making a comparison between Safaricom, Airtel, and Telkom; Safaricom is the largest of the three Telco's, followed by Airtel, and then Telkom.

As seen from this market, the market structure is not expected to change over time. The main reason attributing to this is due to the barriers of entry. The most crucial barrier to entry is government regulations through licenses, patents, and copyrights, and high entry costs.

In most instances, Safaricom produces products that are substitutes of what its rivals produce. Since all Telco Companies offer mobile service provision, they, therefore, deal with similar products, which are direct substitutes to one another. This, therefore, has a significant implication on the pricing decisions of Safaricom, as well as that of its rivals. It is vital to note that oligopoly firms are not "Price Takers," and they differ from price-taking firms in that oligopolies have no supply curve (Gilles & Ruys 2012). The pricing decisions may be well explained using the Kinked Demand Theory. We can consider a scenario where Safaricom wants to change the price of one of its products. This may cause the competitors to react either by ignoring the price changes, or they may decide to match the price change. The implication here is that the decision made by Safaricom's rivals depends wholly on the direction of the price change. For instance, if Safaricom decides to increase its prices, Airtel and Telkom will probably not follow; this is because such a move may allow them to gain more market share. This will, in turn, make the demand curve more elastic, and as Safaricom increases its prices, most customers will tend to buy from Airtel and Telkom. This will decrease the revenue of the "higher-priced" Company.

In the second scenario, if Safaricom chooses to decrease its prices, Airtel and Telkom will surely follow, and they will do so to avoid loss of market share. In this part, the demand curve becomes more inelastic, and this is because all the firms act uniformly. So, a kink in the demand curve develops, where variations in demand move from very elastic at higher prices, to inelastic at lower prices. Since the marginal revenue curve is dependent on demand, it will also be kinked. As the price reduces, the Marginal revenue curve shifts down from MC1 to MC2, and this creates a gap, as shown in the figure above. It is important to note that as the price lowers, there is no change in quantity produced by all firms. The condition remains only if the change in marginal cost lies within the marginal revenue gap.

Conclusion

In conclusion, the kinked-demand curve theory explains why firms in an oligopoly market structure are resistant to price change. If a firm happens to increase its price, there would be a possibility that it would lose its market share to its competitors. On the other hand, if it decides to reduce its prices, the other rivals will counterattack by lowering their prices; this causes all the firms in the market to earn a reduced amount of profit (Piazzai & Wijnberg 2019). Since oligopolies supply a sizable product in the market and deal with similar products; it becomes hard for them to make supernormal profits as any move they try and make to outdo their rivals;...