Pricing Competition Between Cell Phone Carriers in a Growing Market of Customers

Abstract

Many communication markets, such as cellular networks and Internet Service Providers, are characterized by a set of major service providers that support a large customer base. Typically the service providers must compete aggressively for customers, and thus face a problem involving three aspects: (i) how to attract new customers entering the market (i.e. the ones not signed up to any carriers), (ii) how to keep customers loyal to their provider, and (iii) how to entice the rival’s customers to change their carrier. Pricing plays a critical role in keeping customers loyal and also attracting customers to the service. The dynamics associated with pricing raises many challenging dilemmas: on the one hand, by reducing prices the carrier can attract new customers, while on the other hand, it results in a reduced profit resulting from each customer. To examine the inherent tradeoffs associated with pricing, we examine a game-theoretical model involving the sharing of a customer market by a set of providers. In particular, its solution allows to show a direct relationship between customer’s loyalty and pricing.