Head-to-Head or Hand-in-Hand: Has Structural Reform Led to Meaningful Competition in China?

Abstract

Standard theory of industrial organization provides explanation regarding the process of competition development under the setting of a capitalist economy but deals little with circumstances where product market competition is supposed to be among firms who share a single parent--government agencies, as a dominant shareholder. In this regard, the structural reform in the Chinese telecommunication industry provides a unique case study where carriers compete with each other while they are uniformly de facto government-dominated SOEs and are therefore supposed to act in a hand-in-hand, rather than head-to-head, manner. Distortions can arise regarding market conducts and hence market outcome, which is generally characterized by deviation of firms from profit maximization and deviation of regulators from public interests. While competition is relatively established in mobile and VoIP segments, traditional wireline segment is still characterized by regional monopoly. Meanwhile, inefficient market conducts are also seen in aspects such as interconnection arrangement, duplicate construction, and universal service provisioning. They are also impeding competition development. The interpretation of these conducts may rely more on a systemic approach, taking into account a series of macro and micro-factors which determines resource allocation and incentives of competition. It is argued that meaningful and sustainable competition will not come before the establishment of a well-balanced political regime, explicit property system, effective regulatory regime, and ultimately, the general market system.

Keywords: structural reform, telecommunications competition, economic transition, institutions, China

JEL Classification: L11, L96, P31