A Study on modeling user choice and quality differentiation in pricing telecommunications services

Abstract

The recent increase of wired and wireless data traffic has resulted in service quality problems. Although an economic approach to congestion control can be achieved by pricing, this means that the current tariffs of the services do not fully implement the control mechanism. This study aims to establish flexible pricing models for the problem and apply them to Korean telecommunications market with empirical data. To address the increasing data traffic and related managerial issues, this study employs economic concepts of nonlinear pricing such as distribution of demand types, incentive compatibility of pricing schedules and the marginal user. Then, pricing for telecommunications services under various market conditions is examined with three pricing models combining the individual user’s choice with the operator’s revenue maximization. The first model describing the price competition between two services with differentiated quality is established to analyze the competition between the services of which quality is determined by the user’s self-selection against congestion under different capacities of network resources based on Paris Metro Pricing model. By the simulation using the parameters of user’s utility function and the distribution of demand types estimated by a consumer survey, each price reaction function of two service providers is derived and it is found that the degree of quality differentiation is determined by the combination of each provider’s bandwidth in that the service on wider bandwidth is charged higher with better quality. This result explains the price equilibrium with fixed capacity of network resources in a short term, and shows a mechanism inducing the providers to invest in the network resources for service quality. Increasing data traffic is more significant in mobile broadband services. Therefore, due to advances in mobile technology and the introduction of fourth-generation mobile telecommunications such as Long Term Evolution (LTE...