Service provider strategies in telecommunications markets: analytical and simulation analysis

The telecommunications industry has evolved from voice-centric to provisioning of broadband data services. As witnessed in countries around the world, the industry has an oligopoly market structure with a few operators providing services. The services offered by the operators differ in both price and quality of service. On the other hand, consumers differ in their preferences over price and quality with some displaying sensitivity towards price and others towards quality. In this paper, we provide the standard microeconomic framework of supply and demand for telecom services and derive equilibria under varying supply and demand conditions. In particular, we analyse the strategies of new entrants vis-a-vis incumbents in offering service plans over varying price and quality dimensions. We also analyse the equilibria for varying elasticities of demand of consumers. We then validate the analytical results by simulation using an agent-based model with operator and consumer agents. Our results show that new entrants ought to target relatively elastic consumers as their market entry strategy, by offering a combination of low price, high-quality service plans to gain market share. On the other hand, incumbent operators ought to continue to target relatively inelastic consumers who have loyalty towards them due to larger network effects and associated higher switching costs. Our simulation results also confirm the analytical results. Telecom regulators can use the study results in assessing and regulating (i) market power dynamics of incumbents and new entrants, (ii) tariff plans offered by operators for possible predatory pricing and (iii) quality of service to meet threshold minimum quality of standard levels.