Game-theoretic Understanding of Price Dynamics in Mobile Communication Services

TL;DR

This paper models the competitive price dynamics in mobile communication services using game theory, revealing periodic price fluctuations and proposing regulation strategies for optimal market stability and efficiency.

Contribution

It introduces a game-theoretic model combining Cournot and Bertrand competition to explain price fluctuations and suggests regulation rules for market stability.

Findings

Prices fluctuate periodically due to competition dynamics

Proposed regulation rules lead to Pareto-optimal market equilibrium

Regulator's strategies improve user welfare and revenue

Abstract

In the mobile communication services, users wish to subscribe to high quality service with a low price level, which leads to competition between mobile network operators (MNOs). The MNOs compete with each other by service prices after deciding the extent of investment to improve quality of service (QoS). Unfortunately, the theoretic backgrounds of price dynamics are not known to us, and as a result, effective network planning and regulative actions are hard to make in the competitive market. To explain this competition more detail, we formulate and solve an optimization problem applying the two-stage Cournot and Bertrand competition model. Consequently, we derive a price dynamics that the MNOs increase and decrease their service prices periodically, which completely explains the subsidy dynamics in the real world. Moving forward, to avoid this instability and inefficiency, we suggest a simple regulation rule which leads to a Pareto-optimal equilibrium point. Moreover, we suggest regulator's optimal actions corresponding to user welfare and the regulator's revenue.