SCSC2003 Abstract - S6923- 1240716

SCSC2003 Abstract S6928

Simulation in the mobile telephonymarket: price discrimination strategy under asymmetrical conditions

Submitting Author: Mr. Claudio Ferragine

Abstract:
Over the last decade, the development of mobile telecommunications has reached a very high rate of growth in most industrialised countries and, in particular, in Italy. The increasing volume of mobile phone calls and the relative growing number of carriers are transforming mobile telecommunications from that of a traditional monopoly and instead into a market with growing competitive pressures. The older scenario of telecommunication mobile services formed by a state monopoly carrier is changing into one in which there are different competitive companies that offer mobile telecommunication services.
In our paper we will analyse, through our simulation modelling, the relationship between market share and profit resulting from a strategy of price discrimination. In particular, the policy of price discrimination in the mobile telephone market is based on the possibility for the carriers to set different retail prices with regard to calls made on net or off net.
The Italian mobile telephone market is represented by the presence of diverse competitors that operate in competition with the traditional ex monopolist carrier, offering a multitude of services to an increasingly articulated clientele.
The current scenario in the Italian mobile telephone sector is characterized by a more elevated growth rate of demand in the European context and by the presence of the dominate operator TIM that despite the entrance of Omnitel in 1996, Wind in 1999, and Blu in 2000 (even if the
latter did not succeed to reach economic and financial self-sufficiency due to a serious crisis within the market), has consolidated its continental leadership in terms of its market share.
In reality, the liberalization of the Italian sector has come about quite late with respect to other European countries, where the regulators of the sector were a major force of impulse for innovation and market liberalization. The abolishment of the monopoly regime and the progressive opening of the competition had conferred great importance to the role of the regulator, increasing its range of intervention within the sector. Competitiveness produced socially efficient markets that required the definition of body of rules and regulations in order to eliminate possible barriers to entry, such as the conditions of interconnection and the rebalancing of telephone rates.
The crucial factor for the development of competition is the possibility of interconnection between distinct networks. The carriers can strategically use the possibility of customers to chose between on net or off net calls. This has been the subject of present works undertaken by Michael Carter and Julian Wright, who have analysed the interconnection phenomenon between networks. In our paper we also refer to Laffont and Tirole network competition works.
The main aim of our paper is to analyse the competition in the Italian mobile telephone market under the following conditions:
• Asymmetry in market shares.
• Price discrimination’s strategy carrie out by carriers between phone calls which, having originating on the carrier’s own network, finish on the same network (on net) or on the network of another carrier (off net).
The frist condition is representative of the Italian competitive scenario in which there is a dominant carrier in terms of market share. The second hypotesis is based on the possibility of operators to implement different retail prices in relation to calls that are directed on their networks (on net) or those on competitor’s networks (off net). This strategy has already been working for some time now by all Italian mobile telephone carriers. Such price discrimination strategy has as its goal that of introducing user migration towards their own networks. This goal assumes a relevant role with regard to the Italian mobile telecommunications sector, where the penetration rate is very high and not so far from being very close to a context of full participation on the behalf of users. In addition, it has passed from a phase in which the market was in full expansion and whereby carrier’s had the goal of attracting customers that still had not decided to participate in the market t
o a phase in which the market is saturated and the competitive strategy is based on attracting customers from competing networks. The possibility of changing carriers has been favoured by the Italian Communications Authority that has laid out the portability
number of carriers, or rather systems that consent the change of mobile carriers whereby conserving their old number. Portability has greatly increased the migration phenomenon of customers between carriers: it was allowed to come into force on 1 May 2002 and has provoked 25 thousand transfer requests within 15 days, as many as those gathered in the United Kingdom within a year.
The decision by customers to migrate on other carriers is based on two considerations. The first is related to the effective price discrimination strategy being practiced: customers search to migrate towards those carriers that have adopted a system of lower prices. The second refers to the relative dimensions of market shares. For example, even if a carrier fixes their on net prices relatively low, but have a market share of small dimensions, migration would not therefore be convenient for customers that would have a very low probability of carrying out calls on net.
The focus of our work is based, therefore, on the analysis of the convenience by mobile telephone carriers to practice a price discrimination strategy in function with the relative dimensions of their market shares. The goal of such analysis is that of assessing if the price discrimination strategy provokes a different impact in terms of profits and market shares according to relative dimensions. The fact that price discrimination can provoke competitive advantages for an operator to bring about the necessity for intervention by a Regulatory Authority. In order to assure, in fact, that there are not any barriers to entry and the market remains containable makes the intervention by a Communications Authority fundamentally important.
Simulation has been an excellent vehicle for analyzing competition, strategies, and policies in the mobile telephony sector.
In order to verify the convenience to choose a price discrimination strategy as regards to market share, we have tested our model through a simulation program, called Maple.
The simulation software package maple is an example of a Computer Algebra Systems (CAS for short), meaning that it is dealing with problems in symbolic form. This is in contrast to the numerical approach that is usually involved in programming computers to solve problems. A CAS is capable of understanding functions and expressions, but can also be used to perform algeibrac manipulations with expressions and functions and to simulate the trend of some variables. Maple also lets us define our own functions, which can be plotted, manipulated, combined with other functions, etc.
Through a simulation program, from our departing hypothesis we have been able to realise the model development, validation and testing.

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