Pricing of Mobile Services
by
Werner Neu
Arusha, 15 to 17 April 2002
Slide 0
The general rule
ŸŸ Market
Market situation:
situation: There
There isis vigorous
vigorous competition
competition in
in each
each
market
market segment
segment the
the firm
firm operates
operates in.
in.
ŸŸ Within
Within some
some limits,
limits, the
the company
company isis constrained
constrained by
by the
the
market
market in
in regard
regard to
to its
its pricing.
pricing.
ŸŸ In
In each
each market
market segment,
segment, the
the price
price for
for the
the firm’s
firm’s service
service must
must
cover
cover that
that service’s
service’s direct
direct cost.
cost.
ŸŸ Across
Across all
all market
market segments,
segments, the
the margins
margins above
above direct
direct cost
cost
(multiplied
(multiplied by
by the
the services’
services’ volumes)
volumes) must
must cover
cover total
total
common
common cost
cost and
and provide
provide for
for profit.
profit.
Slide 1
The case of opening the telecommunications
market with an incumbent operator
ŸŸ Market
Market situation:
situation: Competition
Competition evolves
evolves quickly
quickly in
in some
some
market
market segments
segments but
but hardly
hardly takes
takes off
off in
in other
other segments,
segments,
e.g.
e.g. the
the local
local market.
market.
ŸŸ Incumbent
Incumbent may
may want
want to
to load
load all
all its
its common
common cost
cost onto
onto prices
prices
for
for local
local services
services (low
(low price
price elasticity)
elasticity) to
to be
be better
better able
able to
to
face
face new
new competition
competition in
in other
other market
market segments.
segments.
ŸŸ Regulator
Regulator needs
needs to
to prevent
prevent this
this as
as itit comes
comes pretty
pretty close
close to
to
the
the strategy
strategy of
of predatory
predatory pricing.
pricing.
ŸŸ Note:
Note: The
The regulator’s
regulator’s policy
policy must
must balance
balance its
its intention
intention to
to
prevent
prevent an
an unfair
unfair pricing
pricing strategy
strategy against
against the
the fact
fact that
that local
local
services
services are
are usually
usually price
price inelastic
inelastic and
and in
in general
general should
should
carry
carry aa higher
higher share
share of
of common
common cost.
cost.
Slide 2
The pricing rule derived from the network
externality and merit good argument
ŸŸ Market
Market situation:
situation: There
There isis low
low penetration
penetration and
and aa substantial
substantial
segment
segment of
of the
the population
population does
does not
not have
have the
the means
means to
to pay
pay
for
for aa telephone.
telephone.
ŸŸ Both
Both the
the network
network externality
externality and
and the
the merit
merit good
good arguments
arguments
support
support in
in this
this case
case lower
lower priced
priced access
access to
to low-income
low-income
people
people and
and remote
remote rural
rural areas.
areas.
ŸŸ ItIt isis important
important that
that the
the so
so subsidized
subsidized price
price options
options are
are
targeted
targeted and
and primarily
primarily are
are used
used for
for the
the people
people for
for whom
whom they
they
were
were designed
designed ..
Slide 3
Penetration pricing
ŸŸ Market
Market situation:
situation: AA new
new service
service isis being
being launched
launched in
in aa
competitive
competitive environment.
environment.
ŸŸ To
To attract
attract customers,
customers, the
the firm
firm starts
starts selling
selling the
the service
service at
at aa
low
low price
price with
with the
the intention
intention of
of raising
raising the
the price
price later.
later.
ŸŸ Alternatively,
Alternatively, the
the firm
firm provides
provides for
for aa give-away
give-away at
at the
the time
time of
of
take-up
take-up of
of service
service in
in the
the hope
hope of
of compensating
compensating its
its cost
cost with
with
higher
higher usage
usage prices.
prices.
Slide 4
Types of mobile services pricing structures
ŸŸ Two
Two different
different approaches
approaches to
to mobile
mobile services
services pricing
pricing :: Calling
Calling
Party
Party Pays
Pays (CPP)
(CPP) and
and Receiving
Receiving Party
Party Pays
Pays (RPP).
(RPP).
ŸŸ They
They provide
provide incentives
incentives for
for different
different penetration
penetration pricing
pricing
strategies.
strategies.
ŸŸ They
They also
also imply
imply quite
quite different
different situations
situations as
as far
far as
as
interconnection
interconnection and
and its
its pricing
pricing are
are concerned.
concerned.
ŸŸ The
The data
data indicate
indicate that
that in
in countries
countries where
where operators
operators use
use aa
CPP
CPP pricing
pricing structure,
structure, mobile
mobile operators
operators have
have been
been growing
growing
faster.
faster.
Slide 5
The network externality argument used in the
case of mobile services
ŸŸ The
The observed
observed relationship
relationship of
of mobile
mobile termination
termination charges
charges
under
under CPP
CPP
-- to
to fixed
fixed termination
termination charges,
charges, and
and
-- to
to their
their costs.
costs.
ŸŸ The
The argument
argument brought
brought forward
forward by
by mobile
mobile operators.
operators.
ŸŸ The
The determination
determination by
by the
the UK
UK regulator.
regulator.
ŸŸ Network
Network externality
externality as
as an
an argument
argument to
to justify
justify higher
higher mobile
mobile
termination
termination charges.
charges.
ŸŸ This
This policy
policy amounts
amounts to
to an
an untargeted
untargeted subsidy
subsidy tending
tending to
to
benefit
benefit also
also users
users who
who do
do no
no need
need it.
it.
ŸŸ Do
Do fixed
fixed operators
operators have
have the
the margins
margins in
in their
their business
business to
to
provide
provide for
for this
this kind
kind of
of cross-subsidization?
cross-subsidization?
Slide 6