Strategic action in network industries: an empirical analysis of the European mobile, страница 6

Hypothesis 2. The probability of a strategic action being cooperative rather than competitive increases with market concentration.

Despite the positive correlation between market penetration and time, both these factors can be expected to have a different effect on the likelihood of a strategic action being collaborative. It is argued here that, although the likelihood of collaboration increases with market penetration and concentration, it decreases with time, after taking the effects of the first two into account.

The European mobile phone industry is based on licenses for a particular technology, which means that basic technological compatibility is given. Early on, firms focus on establishing the basic infrastructure, which frequently requires licensing and other knowledge-transfer mechanisms. They also try to promote the service as a whole, which calls for a number of collaborative agreements. Thus, firms engage in many collaborative efforts in the early stages of the Product Life Cycle to influence the evolution of the industry in their own favor and to achieve a strong position as soon as possible. As the industry evolves, a number of alliances fall into place and the number of unexplored collaborative options is reduced. Technological developments should also lead to fiercer competition with time. Industry-level learning effects may allow some firms to gain cost advantages and technological leaders may want to favor communication inside their own network above crossnetwork communication. The ability to exploit such effects by the individual firm would favor incompatibility (Katz & Shapiro, 1992) and non-collaboration. Hence, as time passes, moves become increasingly hostile.

Hypothesis 3. The probability of a strategic action being cooperative rather than competitive decreases as the industry becomes older.

4.2.  Types of strategic action

In network industries, the three primary activities allow the actual linking of customers via the firm. ‘‘Infrastructure operation’’ provides network access and mediation capacity, e.g., mobile phone base stations and transmission links. ‘‘Network promotion and contract management’’ organizes network membership and develops contractual-level links, e.g., access rights and service pricing. Finally, the ‘‘Service provisioning’’ activities assist and enhance connections over the infrastructure, e.g., customer service and directory assistance. Although the three types of primary activity are performed operationally in parallel, the characteristics of the market (i.e., penetration, concentration, and evolution) determine the type of strategic action related to these activities that the firms are more likely to focus on. We examine the circumstances under which the three primary activities are each likely to constitute the critical aspect of a firm’s conduct in the mobile phone industry.

Once penetration has reached a high level in the market, the size of the networks cannot continue to grow, and firms turn their attention to increasing the volume of transactions. The main way of increasing transaction volume, aside from pricing and improved interconnectivity, is by extending the range of range of services through the addition of new service layers, i.e., offering new services on top of existing networks. The operators of other network layers are ‘‘complementors’’ (Nalebuff & Brandenburger, 1997) which means that, in addition to their inherent value, the new service layers complement the underlying mobile phone service and thus increase the value of subscribing to it (Milgrom & Roberts, 1995; Farrell & Katz, 2000). Moreover, the differentiation in the added value of services becomes more important as the industry approaches saturation. Firms provide new services as a way of differentiating their network from those of their competitors and of increasing the value of their networks. Thus, strategic actions based on the layering of new services are more likely to be found in markets with a high degree of penetration compared with other strategic actions relating to infrastructure and promotion.