OLIGOPOLY: MAXIS

COMMUNICATIONS BERHAD

DEFINITION OF OLIGOPOLY:
Oligopoly involves only a small number of large firms of an identical or similar product. This
situation resulted in each of the firms tend to be wary of each other as rivals and the prices are
held back to some extent for a fear of losing the market share. Firms are interdependent and fear
that a price decrease will be met by competitors and price increases will not.

COMPANY BACKGROUND:
Established in 1995, Maxis was one of the first mobile communications providers in Malaysia.
The company is constantly revamping its business model and was one of the first operators to
introduce 4G services in 2013. Its 4G service reaches 15% of the Malaysian population, making
Maxis a market leader in this area.
Maxis also offers cloud computing to small and medium businesses. The company's 2G and 3G
networks cover 95% and 83% of the Malaysian population respectively.
Maxis' CEO is Norwegian Morten Lundal, former CEO of DiGi.Com, another Malaysian
telecommunications company. He was also a top executive at Vodafone, the U.K.'s leading
mobile phone company.

Maxis is more than 60% controlled by Usaha Tegas, a private investment arm of Malaysian
billionaire Ananda Krishnan.

CHARACTERISTICS:

Maxis, Digi, Celcom and other telecommunication firms set very high entry barriers to entry
exist such as copyrighted, economics of scales and others. However, they are mutual independent
with each other over controlling price. Their industries are so small that each telecommunication
firm has to depend on advertising, marketing, special offer, packaging and many other factors
except playing around with their price. Other than that, Malaysia telecommunication firms also
faced dilemma on to choose whether to compete or to cooperate with rival firms. If they decide
to cooperate, a larger monopoly can be formed and they can enjoy monopoly profit. For example
Maxis provide a variety of mobile communication products and services. They offer prepaid call
plans, monthly subscription plans, international roaming, MMS and WAP.

Summary of Maxis Communications Berhad characteristic:

1.
2.
3.
4.

Few in number but larger in size

Mutual interdependence
Barriers to entry
Product differentiation

PROFIT AND LOSS PROFIT OF MAXIS ( 2012-2014 )

FINANCIAL INDICATORS

2014

2013

2012

(RMm)

Revenue
Service revenue
EBITDA
Nirmalised EBITDA(1)
Profit from operations
Profit berfore Tax (PBT)
Profit after Tax (PAT)
Normalized PAT(2)
Profit attributable to equity holders of the company

8389
8229
4229
4207
2816
2436
1725
1910
1718

9084
8514
4310
4522
2825
2496
1772
2097
1765

8967
8539
4359
4359
2864
2576
1860
2049
1856

(7.7%)
(3.3%)
(1.9%)
(7.0%)
(0.3%)
(2.4%)
(2.7%)
(8.9%)
(2.7%)

FINANCIAL RATIONS
EBITDA margin (%)
Normalised EBITDA margin (%)
PBT margin (%)
PAT margin (%)
Normalised PAT (%)
Interest cover ratio
Ernings per share (sen)
Basic
Fully diluted
Dividends per share(SEN) (3)

2014
50.4
50.1
29.0
20.6
6.6
-

2013
47.4
49.8
27.5
19.5
23.1
7.9

2012
48.6
48.6
28.7
20.7
22.9
8.4

22.9 22.9

23.5
23.5
40.0

24.7
24.7
40.0

40.0

Based on the table above, it said the company maxis had high profit in 3 years in a row.
Therefore, in oligopoly market, there would be supernormal profit for the firm.

Maxis supply conditions can be explained with Kinked Demand which gives an explanation to
underlying reason why an oligopolistic market experiences price rigidity. If the Maxis increases
their rates, it is more likely that other like Digi and Celcom will not increase their rates. Maxis
will end up losing subscribers to other telecommunication provider (Telcos) and lose relatively
large demand as compared to the price increase. Hence, Maxis will face a relatively elastic
demand curve above the point A. When rates are lowered, price war will be started and other
Telcos will lower their rates too.
It is more likely that Digi and Celcom will set their prices even lower than the Maxis. Hence,
Maxis will not see much increase in its demand even with a relatively high price cut. As a result,
Maxis now faces less elastic demand below the point A. Therefore, Maxis should maintain its
rates and should continue to sell at their best rates. When both demand curves is combined, it
will result the demand curve to kink at point A. The MR(marginal revenue) curve will be twice
as steeply sloping.

MC

MR

AR
=D

Outp

Kinked demand curve explains the price inflexibility of oligopolistic firms that do not collude. If
Maxis lowers its rates, Digi and Celcom will lower their rates even further and Maxis will lose
demand and if they increase the rates, the competitors will not follow by increasing their prices
and thus the firm will again lose demand. Therefore, the best strategy is to maintain its current
rates.

In price competition, using game theoretic model, telecommunication companies are assumed to
provide a homogenous product and have sufficient capacity to serve the market demand. It is a
non-cooperative game as there werent any Enforceable agreements between them as they
compete in the marketplace. It is a repeated one-shot simultaneous game as they were driven by
quarterly performance accountable to shareholders. As such, they would decide on their pricing
strategies independently and aware of rivals prices in the market while forming certain
expectations about rivals pricing strategies. Actions available are Maintain Price and Undercut
Price. Payoffs are ranked in order of preference (higher number
is preferred). The most preferred outcome by firms is where one undercuts price whileits
competitors maintains price, leading to market share gain at the expense of its rivals. When all
firms maintain prices, there is no change in market-share
and profitability. When all firms undercut prices, market-share remains with reduced profitability
. ( Anon, 2013 ).

CONCLUSION:
To conclude this assignment it is useful to emphasize the market structure that each firm is
operating, in establishing the main strategies and direction in which each firm should take to
maximize its profit or to reduce loss as lower as possible. By using the characteristics of each of
the four market models, we are able to sort out the market structure of each firm and figure out
the advantages and disadvantages of each of the market model. The table below has shows the
major characteristics of each market structures.

With the help of the table above and the studies done on each firm mentioned in this assignment,
we may sort out the firms that we've selected into their respective market model in terms of
activities, products and strategies. The table below shows the firms sorted to their respective
market model according to their characteristics.