December 1, 2014
Differentiating Between Market Structures in Verizon Wireless
Understanding market structures is important in understanding the competitive environment for companies. The various market structures that may be prevalent in an industry are: oligopoly, monopoly, perfect competition or monopolistic competition. Verizon Wireless “is an innovative wireless communications company that connects people and businesses with the most advanced wireless technology and service available.” ("Verizon Wireless - About Us", 2014) Verizon Wireless provides service to 106.2 million retail connections and is the largest wireless provider in the United States. This paper will provide an evaluation of the market structure, competitive strategies and recommendations for strategies that will help the company maximize profits.
Verizon Wireless operates within an oligopoly market structure. An oligopoly market structure is defined as a market in which that market or industry is dominated by a small number of sellers. In the wireless industry, there are a small number of competitors that dominate the industry, with a number of smaller companies competing in the same industry but in a different space of customers. The top wireless companies are Verizon Wireless, AT&T, Sprint and T-Mobile. Although there is a variance in the pricing that each company offers, because the industry is dominated by these four carriers, each carrier has the capability of maintaining pricing, without having to reduce too much due to competing offers.
Due to FCC regulations, cost of capital for startup, customer preference, etc. there are barriers for companies that want to enter the wireless industry and compete with Verizon Wireless. For example, customers with Verizon Wireless pay a small premium, in comparison to the competitors, for network reliability. Verizon Wireless offers the largest 4G LTE footprint across the United States and regularly scores at the top of the industry for network reliability. If a smaller company would like to enter the marketplace, they must first receive appropriate approvals; however, even after obtaining the approvals, the size and reliability of Verizon’s network makes it difficult for smaller companies to enter into competition with them.
In 2008, when Verizon Wireless was evaluating whether to purchase Alltel, the New York Times wrote, “The consolidation of Alltel takes another step towards rationalizing and consolidating the U.S. wireless industry, something that must be viewed as a positive. Few players will inevitably mean greater pricing stability (although only marginally so, since the smaller operators increasingly have been in the position of taking their cues from the Big Four anyway), and should lead to marketing efficiencies for all players as competition for retail distribution consolidates.” ("Verizon-Alltel And The March Of Oligopoly", 2008) This ability to reduce the number of players in the industry, and providing stable pricing to consumers, with little need to reduce and compete, is reflective of an oligopoly market.
Although similar in nature, not all wireless carriers provide an identical service or maintain a relatively small market share, as generally assumed in a perfectly competitive market. Additionally, due to regulations in the marketplace, companies are not free to enter and exit the industry. Because these characteristics are not present in the wireless industry, Verizon Wireless does not operate in a perfectly competitive market.
If Verizon Wireless operated in a monopolistic market, the company would be the only choice available to consumers. This would allow the company to raise prices at their discretion, while not having to invest the approximate $100B in network performance since 2000. ("Verizon Wireless - About Us", 2014)
Competitive Strategies and Recommendations
In the wireless industry, competitors are