Wireless Technologies: Shifting into the Next Gear?
Simona Fabrizi (Department of Economics and Finance (Albany), Massey University, New Zealand)
Copyright © 2010.
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Mobile Operators (MOs) in several countries are constantly challenged with the urge to further enhance the quality of their existing wireless networks, often dictated by the need to meet the newest technological standards as progress in wireless technologies is made. While the pressure to upgrade wireless networks is constantly felt by MOs in this market, it is not uncommon to observe some MOs upgrading their networks earlier than others. This article provides a theoretical explanation for this apparent paradox of why some MOs postpone the upgrading while others do not. It is shown that in the presence of different types of users - conservative versus quality-seeking - MOs may find it more profitable to adopt asymmetric upgrading strategies. Furthermore, it is argued that the incentives by some MOs not to upgrade are the largest when the share of conservative users in the market is sufficiently high, relative to the additional cost that upgrading entails. In such a case the MOs that do not upgrade their networks enjoy higher profits than the ones that do so.
Introduction And BackgroundMotivation
It is not uncommon nowadays to be confronted with various and continuous forms of advertising by MOs trying to persuade (prospective) customers of Mobile Internet services that their respective network is the fastest, the one with the broader coverage, or the one with the overall best performance, and so on. One such example is that of Telecom NZ with its only very recently proposed slogan to current and prospective customers of broadband Internet services: “Testdrive, Faster in more places”.1 Why would only some MOs engage in the upgrading of their networks? The answer to this question is far from obvious and the aim of this article is to fully characterize under which conditions such a behavior is perfectly rational.
The results of the analysis offer a way to reconcile the apparent contradiction of postponing the upgrading of their networks by some operators, but not others. By means of a theoretical model, the article first provides an explanation for the decision of MOs to engage in the upgrading of their networks. It is shown that those incentives to upgrade are the strongest, the tougher the competition between MOs for market shares, and the more alike the users with respect to their willingness to pay for the enhanced services. Further, it is analyzed and discussed that those incentives for MOs to all upgrade their networks change when the willingness to pay for enhanced services may vary considerably across potential users. In this case, it becomes relatively less attractive for MOs to align their networks to the highest technological standards, when others do so, and this could paradoxically guarantee the MOs that do not upgrade their network’s higher profits than the ones of MOs that decided to do so.
These findings may provide a rationale for why MOs such as, for example, Telecom NZ, are at times more aggressive players than others in their upgrading decisions. For Telecom NZ, that decided to start upgrading its network before its rivals, there is at stake the prospect of being the provider capturing the share of the market formed by the New Zealanders seduced by the enhanced speed of accessing mobile broadband services.2 Similar cases can be found, in which MOs have alternatively behaved as the leaders (pioneers), or the followers, in the adoption of several and subsequent standards.3 A related example, is the case of Telecom NZ that itself took years before adopting the same 3G standards used by its rivals, such as Vodafone NZ, preventing over these years the possibility of international roaming for its subscribers. It is only recent the passage to the same standards as the ones used by its rivals, after Australian operators switched to this alternative standard.
Key Terms in this Chapter
Vertical Differentiation: Different qualities of products or services are offered in the market.
Conservative Users: Users whose additional valuation for upgraded services does not exceed the additional costs for providing them.
Quality-Seeking Users: Users whose additional valuation for upgraded services exceeds the additional costs for providing them.
Mobile Operators (MOs): Operators offering mobile Internet services.
Strategic Game: A game in which each player’s payoff is affected by the combination of actions chosen by this player and every other player – in this article, MOs are players in the strategic upgrading game, where actions are ‘to upgrade’ and ‘not to upgrade’, and payoffs are the profits achievable as a function of all possible combinations of these upgrading decisions.
Individual Rationality Constraint: The incentive an individual economic agent has to participate in a given game. In this article, when this incentive is satisfied a user is ready to accept to subscribe to a network given the subscription fee, the quality and the variety offered by that network.
Horizontal Differentiation: Different varieties of products or services are offered in the market.
Upgrading: Improvement of the quality of mobile Internet services.
Nash Equilibrium: A Nash equilibrium of a strategic game is a profile of strategies , where (is the strategy set of player), such that for each player, and for every , where withbeing the strategies set of any other player but, and where stands for the utility (or payoff, or profits) each player derives as a function of his or her own chosen strategy and the strategy chosen by any other player. Another way to state the Nash equilibrium condition is that solves for each. In other words, in a Nash equilibrium, no player has an incentive to deviate from the strategy chosen, since no player can choose a better strategy given the choices of the other players.
Dominant Strategy: A strategy which is preferred over any other available strategy by one player regardless of what other players’ strategies are.