Sylwester Laskowski

1. Sylwester Laskowski Adviser: prof. Andrzej P. Wierzbicki

2. Subject of presentation Price decision and negotiation support on competitive telecommunication services market.

3. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

4. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

5. Monopoly on the telecom market Goal:maximize Profit - Z D – Demand U – Number of subscribers (market share) C – Cost MR = MC PoM – Profit of Monopoly LOC – Loss Opportunity Cost Price A PM C LAC, LMC PC B DD MR QM QC Quantity

6. Problems of natural monopoly Goal:maximize Revenue - R D – Demand U – Number of subscribers (market share) C – Cost MR = MC PoM – Profit of Monopoly LOC – Loss Opportunity Cost Price A PM B E C D LAC F PC G LMC MR DD QM QC Quantity

7. Problems for entry new operators • New operator has to interconnect his network to incumbent operator’s network • Incumbent operator can subsidize one service by profits from another services • New operator has no experience

8. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

9. The kinds of interconnection POI • Local • Single tandem • Double tandem • Local Loop Unbundling TE TE Double Single Local LE LE LLU

10. The kinds of prices • Price for internal calls – PAAA • Termination fee – PABA (respectively to the lavel of interconnection) • Orygination fee – PAAB • Fixed price for subscription PAF POI PAAB PBAB A B PABA PBBA

11. Fields of competition • Local market • Tandem market • International market

12. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

13. Pro-competitive instruments of regulation • Hard • Proposition of prices • Soft • Reciprocity • Imputation • Unbundling • Cost orientation

14. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

15. Cost based aproach to setting prices • Long Run Incremental Cost Cost LRIC Quantity Additional quantity needed for interconnection

16. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

17. Modeling of: • Function of demand - DAiputn • Distrubution of trafic - AiBj • Number of subscribers - UAiputn

18. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

19. Local operator’s (A) point of view • He sets: PAAA, PAAB, PAAX • He negotiates • with other local operator: PABA, PBAB • with tandem operator: PAXA, PXS , PXD

20. Tandem operator’s (X) point of view • He negotiates • with local operator: PAXA, PXS, PXD • with other tandem operator (Y): PXS, PXD, PYS, PYD

21. General goals of operator’s activity Maximize: • Profits – Z • Market share (number of subscribers – U) • Demand – D (specialization, subscribers are used to subscribeing services) Multi-Objective Optimization problem

22. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

23. Two kinds of market games • Game for profit – game against nature • Known own outcomes matrix (Profit = Revenue - Cost) • Unknown rival’s outcomes matrix (unknown rival’s structure of costs) • Game for market share/ demand – N-person game • Known own and rival’s outcomes matrix

24. Game for profit – game against nature • Iterative setting prices • The best order for A • B sets prices • Negotiations on termination fees • A sets prices (chooseing the best strategy) • Simultanous setting prices • The first case • A, B set their prices • Negotiations on termination fees • The second case • Negotiations on termination fees • A, B set their prices

25. Game for profit – game against nature • Criteria of chooseing strategy • well known • some new • The most promising operator concept • If there is more then 2 competitive operators, the question is: knowledge of which operator’s price decision is – in specific sense - the most valuable

26. The most promising operator concept Denote: SQAX– status quo, Actually computed outcome for operator A with useing X criterion of chooseing strategy. KDOX– Known Decision of Operator O, The outcome computed for operator A with useing X criterion of chooseing strategy, when decision of operator O is known. VIOX – Value of Information, The value of information concerning O operator’s decision computed for operator A with useing X criterion of chooseing strategy.

27. The most promising operator concept The value of information concerning operator O’s price decision: VIOX = KDOX - SQAX Definition. The most promising operator – it is an operator for which VIOX has the highest value.

28. Game for market share/ demand – N- person game Looking for existence of an advantage of the first/the last mover an advantage of the first mover an advantage of the second mover

29. Game for market share/ demand – N- person game • Iterative setting prices • The best order for A – exists an advantage of the first mover • A sets prices • B sets prices • Negotiations on termination fees • The best order for A – exists an advantage of the last mover • B sets prices • Negotiations on termination fees • A sets prices

30. Game for market share/ demand – N- person game • Simultanous setting prices • The first case • A, B set their prices • Negotiations on termination fees • The second case • Negotiations on termination fees • A, B set their prices

31. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

32. Makeing the cake bigger: the case of LO - TO LO’s goal: maximize market share – U TO’s goal: maximize demand – D For increasing U operator A can decrease PAAA, PAAXor Pf Decreasing of PAAX increases D POI PAAX PXAX A X PAXA PXXA

33. Makeing the cake bigger: the case of LO - LO • A – low cost operator with many subscribers • B – high cost operator with little but important subscribers If a big fraction of A’s traffic is directed to B’s network, it is profitable for A to subsidize D for terminating calls in A’s network. PABA – may be even negative. POI PAAB PBAB A B PABA PBBA

34. Agenda: • Liberalisation of the telecom services market • The kinds of interconnection/ prices • Regulated market • Cost /demand-cost based approach to setting prices • Model of demand • Local/tandem operator’s point of view • General goals of operator’s activity • Two kinds of market games • „Makeing the cake bigger” – multiobjective analysis • Conclusions

35. Conclusions • Cost based aproach is not enough for efective competition on telecommunication services market • Elements of Game Theory, and Multi-Objective analisis based on good models of demand and costs are very useful for efective determination of prices and for supporting negotiations.

36. Thank you for your attention! Questions ...?