Simulation of Competition in NGNs with a Game Theory Model

Simulation of Competition in NGNs with a Game Theory Model

João Paulo Ribeiro Pereira (Polytechnic Institute of Bragança, Portugal)
DOI: 10.4018/978-1-4666-5978-0.ch010


Like in a real competitive market situation, Next Generation Networks (NGN) competitors need to adapt their strategy to face/react the strategies from other players. To better understand the effects of interaction between different players, the authors build a Game Theory model in which the profit of each operator will be dependent not only on their actions but also on the actions of the other operators in the market. This chapter analyzes the impact of the price (retail and wholesale) variations on several output results: players' profit, consumer surplus, welfare, costs, and service adoption. The authors assume that two competing FTTH networks (incumbent operator and new entrant) are deployed in two different areas. They also propose in this chapter an adoption model use in a way that reflects the competition between players and that the variation of the services prices of one player has an influence on the market share of all players. Finally, the model uses the Nash equilibrium to find the best strategies.
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The rapid development of new-generation applications, such as high-definition television (HDTV), peer-to-peer (P2P) applications, video on demand, interactive games, e-learning, use of multiple personal computers (PCs) at home, and higher throughput requirements and communication demands make upgrading the access infrastructure a necessity. Ubiquitous broadband access requires a minimum bit rate that is sufficient to allow all citizens to benefit from these services.

The needs of telecommunication networks with higher capacity are becoming a reality all over the world. However, the limitation of local access networks is the major bottleneck to providing broadband access (OECD, 2008).

Service providers, network operators, and Internet access providers are faced with the challenge of providing higher capacity access to the end user and offering wider services (Kota, 2006). Consequently, new Internet infrastructure and technologies that are capable of providing high-speed and high-quality services are needed to accommodate multimedia applications with diverse quality of service (QoS) requirements -Until a few years ago, Internet access for residential users was almost exclusively provided via public switched telephone networks (PSTN) over the twisted copper pair. The new quadruple play services (i.e., voice, video, data, and mobility), which require high-speed broadband access, created new challenges for the modern broadband wireless/wired access networks (J. P. Pereira & Ferreira, 2009). The new services led to both the development of several different last-mile solutions to make the access network capable of supporting the requirements and a stronger integration of optical and wireless access networks.

The broadband market is commonly subdivided into wholesale access (access provided to other operators, normally new entrants) and retail access (access provided to end users). The wholesale accesses are provided for fully unbundled lines, shared access, bitstream access, and resale. However, the availability of fixed wholesale access lines supplied by incumbent operators to new entrants is different between countries. As of January 2012, of DSL connections in Europe provided by new entrants, 63% (32% in 2007) were provided by local loop unbundling, 12.3% (17% in 2007) by shared access, 15.4% (38% in 2007) bitstream, and 8.1% (13% in 2007) were based on reseller products (J. P. R. Pereira, 2013b). The use of shared access, bitstream and resale decreased in recent years (however, full LLU increased).

Regulators must decide whether to promote competition on the basis of a single infrastructure with regulated access (service competition) or to encourage the build-up of competing, parallel infrastructures (infrastructure competition) (Höffler, 2007). Then, is important create the right incentive for operators to make an efficient build/buy choice and define the appropriate pricing principles. To obtain economic efficiency, a regulator should (Andersen.Management.International, 2004): (1) Encourage the use of existing infrastructure of the incumbent operator where this is economically desirable, avoiding inefficient duplication of infrastructure costs by new entrants (incentive to buy); and (2) Encourage investment in new infrastructure where this is economically justified by (1) new entrants investing in competing infrastructure, and (2) the incumbent operator upgrading and expanding its networks (incentive to build).

To simulate competition we analyze the impact of retail and wholesale services price variations on NPV and operator’s profit (payoffs). For that we propose one game to study the impact of retail price variation on NPV (wholesale prices are defined by regulator), and a second game to verify the impact of retail and wholesale price variations on players profit (different wholesale prices in each region). We adopt a scenario with two regions, two providers (players), two retail services, and one infrastructure layers (access to conduit and collocation facilities) – wholesale service. The two competing FTTH-PON networks (incumbent operator and new entrant) are deployed in both regions. We also propose an adoption model in a way that reflects the competition between players – The variation of the services prices of one player as an influence on the market share of all players.

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