The beauty of competition: Are we cheapos? (Now playing Red bean by Faye Wong) You can listen to a realaudio file of this song here.
Starhub made a grand entry into the internet business with the offer of free, no-frills, web-surfing in early December. Within days of their offer, Singnet is quick to respond with an equivalent free internet surfing but with an email account thrown into it. Such a pity though, that while their toll-free lines are extended to Dec 31 2000, it does not apply to this free offer. Nevertheless, I would expect that, when Starhub starts offering its fixed-phone line service, they will offer potential customers a choice between the current Singtel phone service, or a toll-free line where we pay a higher monthly fee but enjoy toll-free access.
Pacific Internet's response to this price war has been very comical. In fact, 1999 had been a year of comic relief from them. Philip Yeo has been complaining about Singnet's toll-free offer months ago, with the memorable "sugar-daddy" phrase, linking Singnet with its parent company, Singapore Telecoms. Now, Pacnet faces Starhub's entrance into the ISP business, which is backed by Singapore Technologies. The comments by Nicholas Lee, Pacnet's CEO, candidly reveal their views towards free-internet surfing. Two particular comments by him in the Business Times amazes me when I read them (emphasis mine) :
"The loss in revenues, however, will not translate into as much loss in profits, said Mr Lee. PacNet will be able to retain the high-value customers. "The cheapos will leave."
" Mr Lee reckoned that eventually the user base will be segregated, with the "cheapskates" gravitating to the free services while those who want quality service paying for it."
Wow! A CEO of Pacnet calling its former customers "cheapos" and "cheapskates". Somehow I really wonder how Pacific Internet managed to win the best ISP award for the past few years, when their bosses can resort to name-calling like these. Maybe it is because they only surveyed people who often call their helpline? Well, I am certainly glad I left them ever since March 1999, after what I felt was a "betrayal of trust" during their first attempt to match Singnet's toll-free offer. Details of that are included here. This recent attempt to match the competition from Starhub, claming these as "atomic weapons" certainly makes me recall that past feeling.
Nevertheless, there are two important economic lessons we can learn from this ISP battle. Firstly, competition serves to make firms cater more towards consumer satisfaction, in terms of lower prices. Here, it is in terms of free internet surfing, which used to cost S$100 per month under Pacnet. I can see that Pacnet is trying to invoke the concept "predatory-pricing" by warning us that, such a price war will eventually lead to a single surviving firm in the ISP market, which will charge us monopoly price in the future. It is up to you whether you believe that will happen, in the light that many ISPs in the west are already giving free internet surfing. In fact, some people have told me that, in America and Europe, most people are surfing on paid ISDN or ADSL networks which offer much greater download speeds. The reason why dial-up lines are free in their ISPs is to encourage newcomers to surf the net and hopefully are attracted enough to be willing to pay for those fast networks. In fact, people in the United States can even enjoy free high-speed DSL connection, click here for an example. The catch in all these free goodies is of course, the willingness to let advertisers know your preferences. Nevertheless, Singapore is really slow when it comes to connecting to the Internet. Let's hope the deregulation in telecommunications will accelerate the process.
Secondly, notice that, until Starhub came to the scene, the original three ISPs are staying clear of price wars among one another. Instead, they focus more on services, such as help-lines, movie passes and such "non-price" competition. What we have learned from the models of Cournot and Bertrand is that competing in terms of prices, instead of quantities, often lead to marginal-cost pricing, which leaves the ISPs with zero economic profit. Thus, most oligopolistic firms prefer not to engage in Bertrand competition. Thus, pursuing Cournot competition lead to those non-price offers as stated above. One can see a remarkable similarity with the various petrol kiosks in Singapore at this present time; the prices are the same but they compete in terms of free tissues, pepsi drinks etc. The idea is the same here, price competition makes all of them worse off, like in the prisoner's dilemma. Engaging in non-price competition is a better alternative for all of them.
Now, what happens when a firm tries to spoil the 'implicit agreement' by engaging in a price war? The economist Robert Axelrod demonstrated, in a famous experiment among economists, that in an infinite prisoner's dilemma game, "tit-for-tat" is the winning strategy to adopt. The tit-for-tat implies that every firm would engage in non-price competition as long as all of them follow the agreement. Once Starhub breaks the agreement, Singnet immediately responds tit-for-tat with their own free unlimited surfing plan. I thank Starhub for forcing this onto Singnet. Otherwise, we will never enjoy such plans at the moment. But poor Pacnet, I think they are now in limbo in the Singapore ISP market, and I think they thoroughly deserves it.
References
Axelrod, Robert The Evolution of Cooperation (Basic Books, NY, 1984).