Game analysis of price competition

among telecommunications operators in

India
Received (in revised form): 13th October, 2010

Niranjan Varma*
is pursuing his masters in telecommunications at the Indian Institute of Technology-Delhi. He studied for his bachelor’s degree in
engineering at Jawaharlal Nehru Technological University-Hyderabad. His areas of interest include telecommunication networks, wireless
communications and telecom markets.

Seema Sharma
is an assistant professor in the area of economics and statistical analysis. She has a PhD from IIT Delhi. The major area of her research
centres on productivity and efficiency analysis. She has published her research in national and international refereed Journals of high
repute. She has participated and presented her research in many national and international conferences in India and abroad and has
travelled widely to countries such as USA, Japan, France, Australia, Thailand and the Czech Republic.

*Bharti School of Telecommunications, IIT Delhi, New Delhi, India

Tel: +91 9810894657; E-mail: varma.niranjan@gmail.com

Abstract After liberalisation of the telecommunications (telecoms) sector in India, there has been
a continuous decrease in telecoms tariffs in the country. In this paper, the authors perform a game
analysis of price competition in the Indian telecoms market. Apart from discussing the effect of
price reduction by operators on the industry, the paper also attempts to determine the equilibrium
price at which the market will stabilise giving sustainable profits to telecoms operators. The
authors consider the cases of rational competition and vicious competition in their analysis.

KEYWORDS: telecoms operators, revenue, growth, price war, game analysis, Nash equilibrium
JEL CLASSICIATION: L96

PRINCIPAL MANAGEMENT was to provide access to all people for certain

IMPLICATIONS
The history of the telecommunications
(telecoms) industry in India starts way back in
1851. The Department of Telecom was
constituted in 1985, but there was no significant
development in the industry until liberalisation
of the telecoms sector in 1994.1 In the pre-
liberalisation scenario, telephone density was 0.8
per 100 persons compared to the world average
of 10.0 per 100 persons. In 1994, the
Government announced its National Telecom
Policy (NTP), which defined certain important
objectives, like availability of telephony on
demand, provision of world class services at
reasonable prices, ensuring India’s emergence as
a major manufacturing base of telecoms
equipment and universal availability of basic
telecoms services to all villages. The major goal
basic telecoms services at affordable and
reasonable prices.2
To provide an effective regulatory
framework and adequate safeguards to ensure
fair competition and protection of consumer
interests, the Telecom Regulatory Authority of
India (TRAI) was constituted in 1997. The first
tariff regulation was issued in 1998 by TRAI.3
The Government recognised that the result of
the liberalisation thus far had not been entirely
satisfactory. In 1999, a new National Telecom
Policy was introduced with the main objectives
of achieving efficiency and transparency in
spectrum management, and protecting the
defence and security interests of the country,
thereby enabling Indian telecoms companies to
become truly global players.4
The tariff decline started with the

352 Journal of Telecommunications Management Vol. 3, 4 352–359 # Henry Stewart Publications 1754–1662 (2011)
 Game analysis of price competition among telecoms operators in India
notification of the Telecommunication Tariff
Order (TTO) in 1999 by the regulator and
continued thereafter. A few years ago a local
call from a mobile cost around Rs15 per
minute and calls received by mobile subscribers
cost about the same. Today it costs less than 50
paise per minute for outgoing calls with
absolutely no charge for incoming calls. The
major drivers for this fall in telecoms prices
have been liberalisation, globalisation, new
players, new technologies and services, and
lower equipment costs. Liberalisation and
globalisation are creating new types of telecoms
players, which are investing hugely and
changing their strategies as the market evolves.
With advancements in technology, switching
and transmission equipment costs are decreasing
considerably and more capacity and bandwidth
are available at lower costs.5
The rest of this paper is organised as follows.
The next section presents a discussion on
revenue and growth of the telecoms industry in
India. It also discusses trends in average revenue
per user (ARPU) and comparisons with global
markets. A cost analysis of the Indian telecoms
industry and drivers for low prices in the
industry are discussed in the third section. A
model for analysing price competition in the
market is given in the fourth section, together
with a discussion of the marginal costs involved
in the Indian telecoms industry. Finally, the
study is concluded in the fifth section.
THE TELECOMS INDUSTRY IN
INDIA: REVENUE AND GROWTH
PERFORMANCE
The telecoms sector is one of the fastest
growing sectors in India and the fastest
growing telecoms market in the world, with a
compound annual growth of 34 per cent over
the last decade. This impressive rate is a result
of India’s economic growth and liberalisation
policy since 1991 and the fundamental,
structural and institutional reforms during that
period. Today, India has nearly 490 million
subscribers and, with an annual addition of
more than 125 million over the last couple of
# Henry Stewart Publications 1754–1662 (2011) Vol. 3, 4 352–359
years, India reached 600 million subscribers
(including wireless and wireline) in 2010.6
Greater demand for better services and speed
have made the market more competitive. As a
result, tariffs have been falling continuously
across the board, making Indian tariffs one of
the lowest in the world. Going forward, the
sector is likely to achieve larger growth rates
with a whole range of new services expected
over the next few years with the coming of
3G.
The total subscriber base (both wireless and
wireline) of the telecoms sector in India during
the financial year 2009–10 crossed the 600
million mark. The telecoms industry notched
up 38,520 crores of rupees in revenues during
the quarter ending 31st December, 2009,
helped by a recovery in mobile and landline
services.7 The growth in the subscriber base in
the Indian telecoms sector is shown in Figure 1,
which clearly illustrates the rapid rate of
subscriber growth.
ARPUs have been decreasing over the last
few quarters with a sharp decline in tariffs
despite the increase in minutes of usage per user
per month.8 It can be observed from Table 1
that the revenue of the telecoms industry was
growing over the last few quarters, but it
almost stabilised in the last three quarters even
when subscriber additions were significant.
This is due to sharp declines in ARPUs and
tariffs in the telecoms sector. Table 1 presents
the revenue of the telecoms industry and
ARPUs in India over the last few quarters.9
Comparison with global markets
In India, telecoms tariffs are the lowest in the
world and ARPUs are declining.10 Despite low
ARPUs, the telecoms operators in India are
getting very good gross revenues compared to
their counterparts in Europe and other parts of
the world due to their huge subscriber base and
the growth in that subscriber base. But, at the
present rate of growth in teledensity and
decline in ARPUs, the industry cannot be
sustained if tariffs continue to go down at the
present rate. Telecoms tariffs in various
countries are presented in Table 2.
Journal of Telecommunications Management 353
Varma and Sharma

Figure 1: The growth of the Indian subscriber base, 1999–09 (in millions)
Source: Telecom Regulatory Authority of India (TRAI), Government of India ‘Annual Report 2008–09’, 2009, New Delhi.

Table 1: ARPU and revenue of the telecoms industry Table 2: Telecoms tariffs in various countries

Quarter Revenue ARPU (Rs) Country Tariff (US$)

(Rs cr7)
Belgium 0.23
Oct–Dec 2009 14,090.63 155.60 Italy 0.22
Jul–Sep 2009 14,311.14 173.66 UK 0.19
Apr–Jun 2009 14,540.94 191.28 France 0.17
Jan–Mar 2009 14,197.06 207.87 Brazil 0.16
Oct–Dec 2008 13,696.50 221.84 Philippines 0.11
Jul–Sep 2008 12,323.04 226.71 Taiwan 0.11
Apr–Jun 2008 12,027.33 246.71 Argentina 0.11
Jan–Mar 2008 11,454.41 253.44 Malaysia 0.09
Oct–Dec 2007 10,346.62 267.91 Hong Kong 0.05
Jul–Sep 2007 9,496.56 280.53 Thailand 0.05
Apr–Jun 2007 9,013.80 308.07 China 0.03
Jan–Mar 2007 7,627.34 301.38 India 0.02
Oct–Dec 2006 6,974.32 315.93
Jul–Sep 2006 6,330.27 335.46 Source: BSNL, Government of India (2008) ‘Growth of Telecom
Apr–Jun 2006 5,620.59 346.59 Sector in India’, TDSAT, Chennai
Jan–Mar 2006 4,942.12 356.21

Source: Cellular Operators Association of India (COAI) ‘ARPU

Revenue Analysis Report’, Q1 2006 to Q4 2009, New Delhi
COST ANALYSIS OF THE INDIAN
TELECOMS SECTOR
The costs involved in the telecoms industry can
be broadly classified as fixed costs and marginal
costs. Fixed costs refer to the costs that are
related to the licence fee, infrastructure
deployment and real estate costs. Marginal costs
refer to spectrum charges, interconnection
charges and termination charges. Three
approaches are followed to evaluate these costs,
namely, top-down methodology, bottom-up
methodology and outside-in methodology.

354 Journal of Telecommunications Management Vol. 3, 4 352–359 # Henry Stewart Publications 1754–1662 (2011)
 Game analysis of price competition among telecoms operators in India
After evaluating the costs involved, pricing of
the services is done by four methodologies,
namely, discretionary price setting,
benchmarking, rate of return and price cap.11
The top-down model is based on an
operator’s accounts, taking into consideration
the service costs incurred in the previous year.
The bottom-up model estimates the cost that a
hypothetical reasonably efficient operator
would incur providing the same services as the
incumbent. The outside-in approach uses
‘proxy’ estimates from outside sources vis-a`-vis
establishing cost benchmarks and a range of
costs for services or facilities.
In the discretionary price setting, strong
focus is on social objectives, usually prevalent
in government-operated telecoms networks. In
benchmarking, prices are set by comparison
with similar countries, eg those with similar
national/geographic characteristics, similar
markets etc. In the rate of return approach, the
operator is allowed to make a certain return on
investment. In the price cap approach, revenue
received from a ‘basket of services’ is regulated.
In India, the pricing policy is not discretionary
for the players because TRAI adopted the price
cap pricing methodology.12 In price capping,
the prices of services like local calls, subscriber
trunk dialling (STD) calls, short messaging
service (SMS) and packet data are not regulated
individually. They are viewed as a basket of
services and the operator has to submit a report
on the price packages provided in order to gain
approval from the regulator.
MODEL OF TELECOMS MARKET
In this section, price competition in the Indian
telecoms industry is modelled mathematically
and a game analysis is applied to determine the
effects on revenue and product demand of a
telecoms operator reducing its prices. The Nash
equilibrium is obtained for the cases of rational
competition and vicious competition.
Mathematical modelling for price
competition analysis
Suppose there are n operators providing
services, namely I, J, K, . . . nth operator,
# Henry Stewart Publications 1754–1662 (2011) Vol. 3, 4 352–359
assuming that the services provided by all
telecoms operators are identical and consumers
are sensitive to prices. So only the telecoms
operator whose price is low can sell its
products. Let pi, pj, pk, . . . be the prices of
telecoms operators I, J, K, . . . nth, respectively,
and also assume that the product demand of
operator I is a – pi when operator I has the
lowest price in the market compared to all
other players in the market; the product
demand of telecoms operator I is (a – pi)/n
when all operators are pricing their products at
the same price; and the product demand of
operator I is zero when its price is greater than
that of any other operator, as shown below.
8
<ða  pi Þ; if pi < pj ; pi < pk ; :::pi < pn
qi ðpi ; pj ; pk Þ ða  pi Þ=n; if pi ¼ pj ¼ pk :::pn
:
0; if pi > pj or pi > pk ; :::pi > pn
(1)
Where a is a constant much greater than the
costs, and a – pi denotes that the higher the prices
of operator I, the lower its product demand and
hence the lower the number of subscribers for its
product. The same assumptions are applicable to
J, K, . . . nth.13
Price war in the telecoms sector
Due to intense competitive rivalry, a price war
leads to a multilateral series of price reductions.
One operator lowers its prices, then others
lower their prices to match. If one operator
reduces its price again, a new round of
reductions starts. In the short term, price wars
are good for consumers but often they are not
good for the operating companies involved.
Today, there are 11 telecoms operators in
India and there is no limit to the number of
operators per circle. New telecoms operators
with deep pockets are very enthusiastic in the
Indian telecoms industry and are ready to bear
initial loses in order to become established in
the market. With falling ARPUs and declining
tariffs the industry will not be able to provide
services if the costs involved are not considered
when setting prices, even though the 3G
auctioning process is at the penultimate stage
Journal of Telecommunications Management 355
Varma and Sharma

and huge money is being invested to acquire ða  c2 Þ2

ui ¼ uj ¼ uk ¼ ::: ¼  c1 ¼
spectrum.14 If operators lose their revenue at 4n
this stage due to vicious competition in the a2 ac2 c22
 þ  c1 (5)
telecoms sector, the industry’s growth will be 4n 2n 4n
slowed down. In such a case, it is necessary to This is the revenue function of each operator.
discuss price competition among telecoms Now suppose operator I reduces its prices, ie,
operators. pi<pj<pk ...) set pi ¼ na, then the revenue
According to the characteristic that the cost function of operator I is:
of a communications enterprise has a larger
proportion of fixed costs and a smaller u’i(pi, pj, pk ...)=qi(pi, pj, pk ...)(pi – c2) – c1
proportion of marginal costs, it is assumed that ðn  1Þa2
the prices of all the operators are the same, ¼  c1 (6)
n2
namely, the fixed cost is c1, and the marginal
cost is c2. The revenue functions of the three Comparing (5) and (6), because it was assumed
enterprises are: that a is much greater than costs u’i(pi, pj, pk ...)>
ui(pi, pj, pk ...) (actually it is true for all n > 4/3)
ui(pi, pj, pk, ...)=qi(pi, pj, pk, ...)(pi – c2) – c1 and: q’i ¼ ðn1Þan > q1 ¼ ac 2n . Here it can also be
2

uj(pi, pj, pk, ...)=qi(pi, pj, pk, ...)(pj – c2) – c1 (2) observed that the new revenue of the operator
uk(pi, pj, pk, ...)=qi(pi, pj, pk, ...)(pk – c2) – c1 includes extra revenue of ac2/2n which may be
... interpreted as revenue from new customers who
joined the operator after it reduced its prices.
According to the price competition model, From the above analysis it can be observed
when, the revenue functions of telecoms that, by decreasing the price of services, an
operators I, J, K, . . . nth are (from (1)): operator can increase its subscriber base and
revenue. The same analysis can be applied to
a  pi
ui(pi, pj, pi, ...)= (pi – c2) – c1 any number of operators. Hence operators
n decrease their prices to increase their market
a  pj
uj(pi, pj, pi, ...)= (pj – c2) – c1 (3) share and revenue. Since the market was
n considered to be price sensitive, if one operator
a  pk
uk(pi, pj, pi, ...)= (pk – c2) – c1 reduces its prices others will lose their
. . .. n customers and, in order to hold onto their
market share, they also need to reduce their
It is known that, for the revenue function to be prices. This leads to a price war in the market.
maximum, its first order derivative is zero. The above analysis could be extended to more
Taking the partial derivatives of (3) with than three players. Here the authors made an
respect to their prices and equating to zero15 assumption that the market was completely
obtains: price sensitive, whereas in a real-life scenario it
@ui 1 would not be the case.
= ða  2pi þ c2 Þ  c1 The above analysis can be appreciated by
@pi n
observing the trends of subscriber base growth
@uj 1 and revenue growth in the telecoms industry
= ða  2pj þ c2 Þ  c1 (4)
@pj n over the last decade when telecoms tariffs are
@uk 1 reduced by operators to increase their revenue
= ða  2pk þ c2 Þ  c1 and subscriber base. The cumulative growth of
@pk n
the industry in terms of revenue can be
Solving these equations: pi=pj=pk= ...=aþc
2 ,
2
observed in Table 1 when tariffs are reduced.
ac2
qi=qj=qk= ...= 2n and the value of the The impact on the subscriber base also can be
revenue functions of I, J and K are: observed in Figure 1.

356 Journal of Telecommunications Management Vol. 3, 4 352–359 # Henry Stewart Publications 1754–1662 (2011)
 Game analysis of price competition among telecoms operators in India
Nash equilibrium
The price war will continue until one of the
operators encounters a price below which it
cannot sell its products without making losses.
At this price, the price war will end and prices
in the market will come to an equilibrium
point. In game theory, the Nash
equilibrium16,17 is a solution concept for a
game involving two or more players in which
each player is assumed to know the equilibrium
strategies of the other players, and no player
has anything to gain by changing only their
own strategy unilaterally. If each player has
chosen a strategy and no player can benefit by
changing their strategy while the other players
keep theirs unchanged, then the current set of
strategy choices and the corresponding payoffs
constitute the Nash equilibrium. The Nash
equilibrium concept is used to analyse the
outcome of the strategic interaction of several
decision makers. In other words, it is a way of
predicting what will happen if several people
or several institutions are making decisions at
the same time, and if the decision of each one
depends on the decisions of the others.
To obtain the Nash equilibrium two market
situations have to be studied, namely, rational
competition and vicious competition. In
rational competition, analysing from the
perspective of profitability, price competition
will end when one of the operator’s profits is
zero. Operator I can reduce its prices to a level,
c2+c1 / qi, at which point the profits of operator
I are zero. Suppose there is some other
operator, say L, which has less product demand
than operator I. While I is reducing its prices to
increase its revenue, at some point prices will
reach a level where operator L is making zero
profit due to its low product demand. Then L
has no advantage from price competition. At
this point, because L will make a loss if it
further reduces its prices, it will not reduce its
prices below the level c2+c1 / ql and even I
would like to maintain profitability. Without
loss of generality, the same theory can be
extended to all other players in the market.
Thus the price war comes to an end with the
equilibrium price: (c2+c1 / ql, c2+c1 / ql, c2+c1 /
# Henry Stewart Publications 1754–1662 (2011) Vol. 3, 4 352–359
qi...), where operator L has the least product
demand ql.
Discussing the above process step-wise, four
steps are encountered:
. Step 1: Operator I reduces its prices to
increase its revenue and product demand.
. Step 2: Other operators also reduce their
prices to match the prices of I if they are
more than c2+c1 / ql, where ql is the product
demand of the operator having least product
demand.
. Step 3: If the prices of operator I are greater
than c2+c1 / ql, then repeat steps 1 and 2.
. Step 4: If the prices of operator I are equal to
c2+c1 / ql, the price war ends and the Nash
equilibrium is (c2+c1 / ql, c2+c1 / ql, c2+c1 /
qi...).
If price competition does not end at the above
point, the market enters into vicious
competition. In vicious competition, when a
telecoms operator’s profits are zero, it will
reduce its prices further, in order to explore the
market,18 but only to such a level where it can
cover at least its marginal costs, c2. Although its
prices cannot cover fixed costs, the operator
can cover marginal costs and still explore the
market. This is the case where an operator has
been providing services for a long time and has
already recovered its capital investment. So, the
Nash equilibrium in this case is: c2, c2, c2...).
To get a numerical insight of the results
derived above, suppose there are two operators
in the market with fixed and marginal costs
involving Rs100 and Rs0.5, respectively.
Suppose that the first operator has a product
demand of 200 minutes of usage and the second
operator has a product demand of 100 minutes
of usage. Then, from the above analysis, it can
be observed that the equilibrium price in
rational competition is (0.5+100/100, 0.5+
100/100), ie (1.5, 1.5), and in vicious
competition the equilibrium price is (0.5, 0.5).
Here notice that in rational competition the
first operator is making a profit and the second
operator is just able to sustain itself in the
market, but in vicious competition neither of
Journal of Telecommunications Management 357
Varma and Sharma
the operators is making a profit. For example,
suppose that a new operator with deep pockets
enters the competition and decreases the price
below the existing market price to build a
subscriber base. If the equilibrium prices
derived above are not considered, due to the
price war in the market, all the operators will
have to incur losses and the industry will suffer
in the long run.
Indian market
In India, marginal costs at present comprise a
spectrum fee of 2 paise per minute, an
interconnection fee to be paid by the operator
to the backbone network of 13 paise per
minute, and a termination fee to be paid by the
operator to another operator if a call is made
from its network to another network of 20
paise per minute.19 By considering the above
costs involved, the marginal cost is 2 paise for
local calls within the same network, 15 paise
for local calls to other networks, 22 paise for
STD calls within the same network and 37
paise for STD calls to other networks. These
charges include the spectrum fee,
interconnection charge and termination charge.
Operators can provide lower prices than these
if they can negotiate interconnection charges to
a lower level.
From the results derived in the above
section, it can be observed that the tariff
prevailing in the Indian market — around 60
paise/minute — is fairly above the marginal
cost level and therefore there is rational
competition. It should be noted also that
telecoms operators can sustain vicious
competition only after recovering their capital
investment, otherwise they will run into losses
in the long run. Hence, TRAI has to keep a
vigilant eye on competition in the market as
operators have invested heavily in acquiring 3G
spectrum recently and new operators are
entering the market.
CONCLUSIONS
The telecoms industry in India is rapidly
growing in terms of subscribers and revenue.
But the sector is losing ARPU and this is being
358 Journal of Telecommunications Management
compensated by huge additions to the
subscriber base. In India, teledensity has reached
a level of more than 52 per cent and the
remaining untapped market lies in rural areas.
Until now, revenues have been growing
rapidly due to significant additions to the
subscriber base and good ARPUs. But the
revenues of telecoms operators during recent
quarters were almost stabilising, despite huge
additions to the subscriber base, due to a sharp
fall in tariffs. With the current growth rates in
the subscriber base, the market will saturate in
the near future and tariffs also will reach an
equilibrium level.
From this analysis, the authors found that,
when a telecoms operator reduces its price, its
market share will be larger and even its profits
will increase. This is the reason for price wars
between telecoms operators. In rational
competition, the price reaches equilibrium at
the zero margin level of an operator whose
product demand is the lowest. In the case of
vicious competition, the equilibrium price of a
service is its marginal cost.
Acknowledgments
The authors gratefully acknowledge the
support offered by the Department of
Management Studies and Bharti School of
Telecommunications, Technology and
Management, IIT Delhi.
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 Game analysis of price competition among telecoms operators in India
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Journal of Telecommunications Management 359
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