The Public Incumbent's Defeat in Mobile Competition : A Revisited Study of Telecommunication Reforms

Within a mere five years of market competition, the mobile communications sector in Taiwan has reached over a 100 percent penetration rate, currently ranking near the top of the world. However stunningly this is, the state-owned incumbent, Chunghwa Telecom, handed the leadership status to a market entrant, Taiwan Cellular Corp., despite excessive mobile communications development. This paper explores the causes that placed Chunghwa Telecom behind in competition against its rival entrants. Our ECM analysis substantiates that handset subsidies are the most effective instrument among others for mobile firms to gain the market share. Chunghwa Telecom was nevertheless prohibited from adopting such a marketing strategy due to budgetary constraints governing state-owned enterprises provided by Budget Law. The econometric results provided in this paper indeed contradict the state theory in that a state-owned enterprise under market competition might no longer remain strong and capable in extracting social resources. Instead, state ownership evolves into a barricade to capability and competitiveness for the not-yet-privatized company in a liberalized market. Taiwan's case sheds light on how to produce a better outcome for telecommunications reforms: privatization should be simultaneously carried on with liberalization