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Market Modelling in Access Networks

Market Modelling in Access Networks

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Paper S1-2

combining dynamic systems and Game Theory

A. Manuel de Oliveira Duarte#, *, Hugo Silveirinha Flix#, *, Alexander N. Marques#, *,

David C. Carrilho#, *, Sara C. R. Coelho#, *

Campus Universitrio de Santiago, Aveiro, 3810-193 AVEIRO Portugal

#

*

Institute of Telecommunications

Aveiro, Portugal

Abstract This paper presents an approach to the technoeconomic evaluation of access networks where market behaviour

and competition effects are modelled resorting to system

dynamics and game theory reasoning. This approach differs

from what is conventionally done in the following aspects: (i) The

presence of an operator in a market, which is usually modelled

by some kind of logistic curve with initial and final penetration

rates, now takes into consideration the presence of other

operators in a dynamic fashion, influenced by a quality function

where parameters such as bandwidth, offered services, tariffs

and contention ratios are involved; (ii) competing operators are

evaluated not only in terms of market shares but also in terms of

economic results.

In order to validate the presented ideas, the approach is applied

to a situation representative of an urban area where two

operators compete with FTTx technologies. The results illustrate

the potential of the combined system dynamics and game theory

approach.

In addition to its value as a methodology to study real world

situations, the present approach has also been used as a valuable

pedagogic tool simulating a business environment in

telecommunications engineering capstone project classes;

allowing activities such as the following: (i) Market gaming

around a set of business cases where students are organized in

teams playing different engineering professional roles (role

playing); (ii) Linking the outcome of market gaming and

associated business cases with syllabus topics and with practical

issues, resorting to engineering decisions that have to prepared

based on technology choices, network design, market simulation

and economic-financial analysis.

This pedagogic value has already been recognized by the award

of a prestigious international prize: "HP Innovations on

Education Grant".

Keywords access networks, techno-economics, market

modelling, dynamic systems, game theory

I. INTRODUCTION

One of the dominant aspects of todays telecommunications

networks is the limitations in terms of bandwidth imposed by

the access segment. In many countries such situation

undermines the sustainable development of this sector and

Generation Networks (NGN).

Improving the performance of existing access networks is

thus an unavoidable necessity. However, the investments

involved in such operation are immense and depend on a large

number of factors, some of them largely unpredictable (e.g.:

market up-take of new technological solutions and services,

national and international economic dynamics, etc). In order

to cope with the uncertainty associated with all these factors it

is imperative to use adequate tools for techno-economic

analysis and evaluation of engineering solutions associated

with each scenario under consideration.

Techno-economic analysis of telecommunication systems

and services, combining the economical and business aspects

with comprehensive technical parameters has attracted the

interest of many researchers worldwide and many studies have

been published over the last decades [1], [2], [3], [4], [5], [6],

[7], [8], [9]. A common feature of all these approaches is that

modelling of the presence of an operator in a market is done

by some kind of logistic curve with initial and final

penetration values and a sigma behaviour more or less

optimistic depending, in a heuristic manner, on some kind of

expectation about market power and user acceptance. Such

approaches do not incorporate the dynamics of market

behaviour with operators gaining or losing market share in a

variable manner over time, as a function of multiple

parameters such as offered services, tariffs and other

perceived quality aspects (eg. contention ratios, latency, etc).

In the following section an alternative approach to the

techno-economic evaluation of access networks is presented

where market behaviour and competition effects are modelled

resorting to system dynamics and game theory reasoning.

The ideas behind this approach have been influenced by [10]

and are explained ahead resorting to the following example:

telecom operators wants to invest in a new

technology (e.g.: delivering fiber-to-the-home):

[1, )]

: { },

Assume that the market adoption of this technology

(supplied by whatever operator) follows the

commonly used S-shaped logistic curve as depicted

in figure 1 and described by the following equation

[1]:

() =

x

x

x

Paper S1-2

3)# () = # ( 2 6) + 6# ( 2 6),

x

can be written as:

6# ( 2 6)

(5)

6$ ( 2 6)

where 6$ () is defined as deviation at time t of $ ()

relative to $():

6$ () = $ ( 2 6) 2 $()

6# ( 2 6) = 6$ ( 2 6).

(1)

Where:

() is the adoption rate of the technology in the

market over time t;

is the initial adoption rate at t=0;

is the adoption rate at saturation when ;

(4)

[1, )]

6# ( 2 6)

#( 2 6) #( 2 6)

6# ( 2 6) = 6$ ( 2 6).

.

6$ ( 2 6) $( 2 6)

$( 2 6)

and

#( 2 6) ==

(6)

% #8 ()

% # ()

x

The ratio

6# ( 2 6)

#( 2 6)

6$ ( 2 6)

$( 2 6)

function of operator O9 relative to its quality:

6# ( 2 6)

#( 2 6)

= ;& ()

6$ ( 2 6)

(7)

$( 2 6)

constant value over time:

x

(t=0) the market share among the different operators

has the following distribution:

{# (0)},

[1, )]

Assume that the perceived relative quality of

operator as compared with the other operators at

the beginning of the process ( = 0) is $ (0). This

will be further clarified latter.

Define average weighted quality [10] of the market at

instant t as:

$() =

x

%' +' (*)

(2)

as:

$. ()

& (*)

$- () = ' $-. = ///////

(3)

&(*)

$()

share changes can be described by the following set of

dynamic equations:

6# ()

= ;& () = ;&

6$ ()

(8)

normalized deviation of $ ( 2 6) relative to

$( 2 6), the average weighted quality of the overall

market at instant 2 6:

6$ ( 2 6) = $ ( 2 6) 2 $( 2 6)

(9)

and (4) yelds:

# () =

# ( 2 6) +[$- ( 2 6) 2 1]. ;& (). #( 2 6)

(10)

beginning of the process, the evolution of market

share of the set of operators { } can now be

calculated by solving the above set of difference

equations.

Paper S1-2

Example:

For a specific example of a market with 3 operators, 10.000

users, initial relative qualities and market shares given by

Table 1, the market share evolution over a period of 36 time

units is given by Figure 2

Table 1. Relation between operator, quality of service and

initial market share

Operator

Initial Relative

Qualities

A

B

C

0,937

1,057

1,007

=# ( 2 6) +[$- ( 2 6) 2 1]. ;& (). #( 2 6). - ()

(11)

with the logistic curve depicting the adoption of the

technology/service by the market the end result becomes as

shown in Figure 3.

{# (0)},

[1, 3)]

70%

7%

23%

(with technology/service adoption effects incorporated)

(without the incorporation of technology/service adoption

effects)

In order to make the model more realistic an adjustable

randomness factor R 9 (t) has been introduced in the dynamic

equation:

$=

considering that the relative quality of operator n, $- (), can

be expressed as a function with the following structure:

KL

QL

TUL

'DEW ()

%LXM

BCDED (F)GHI9J NPI9J NSI9J

NV

'>?W

Ti

KM

QM

TUM

%XM >?@ ()A

ghI9^ a

TiM

_`Z\

_`bcd'

f

aYbcd' I9^

aeI9^ a

YZ\ I9^

_`Z\M

_`bcd'M

fM

(12)

Where:

x

x

x

x

x

x

x

x

x

x

x

x

Ptech(i) - percentage of users of the ith technology;

ntars(i) - number of different tariffs for every technology;

Perctarifa(j) - percentage of users adopting tariff (j);

relative weight attributed to the service pack offered to

users;

S number of services associated to the service pack

offered to users;

relative weight of the tariff offered to users;

V tariff value;

relative weight of contention rate;

TC contention rate associated to the tariff;

relative weight attributed to offered bandwidth in the

quality vector;

BW bandwidth associated to the network architecture /

chosen technology;

x

x

x

the network;

R degree of occupation of the network for a certain

technology;

relative weight attributed to the installation fee in the

quality vector;

TI installation fee charged to new adopters.

To illustrate further the dynamic approach model we

consider now an example of 3 operators competing for an

access network market evolving from ADSL to FTTx

technologies. The initial market situation is presented in the

following table:

Paper S1-2

Operator A

N of users

90.000

Yearly Tarif (pack A)

% Users Pack A

Yearly Tarif (pack B)

% Users Pack B

Operator B

100.000

Operator C

150.000

25

25

50

650

500

600

75%

60%

50%

600

400

500

25%

40%

50%

periods of 12 time units after which the Operators are allowed

to change their market strategies (eg: changing tariffs,

increasing bandwidth, etc). Some of these changes imply

investments or other costs that are taken into account.

The evolution in terms of market shares and financial

results for this case are depicted in the following figures.

(c)

(d)

Figure 4. One practical example of market shares, financial

results and quality function

(a)

IV. A GAME THEORY APPROACH

As mentioned before, in the above approach each operator

was allowed to change its market strategy every 12 time units.

In the results presented in previous section these changes were

done resorting to reasonable and plausible decisions. This

leaves one question unanswered: what is the best (optimum, if

possible) decision that each operator should take when he is

allowed to change its strategy?

(b)

Operator decisions were considered as a non-cooperative

game [12] where, at each decision point, each operator makes

its choices in order to improve its economic results (NPV was

considered as the pay-off function). Obviously this mechanism

has to be subject to some willingness to pay function on the

part of the users, otherwise it would be possible for each

operator to raise its tariffs in an arbitrary manner (even if we

exclude collusion attitudes).

Paper S1-2

j() = 1 2 (k(.) + lk() 2 k(.)m

noplq(**r)m

8

) (13)

To illustrate the approach we consider a simple situation

with 2 Operators where only tariffs are used as strategy

parameters. The calculations were based on a 15 time-units

horizon with its associated investments, costs and revenues.

of the starting value and could occur every 2 time units. NPV

values for all possible tariff combinations were calculated

giving rise to a pay-off matrix.

In order to find Nash Equilibrium Points this matrix was

treated following two separate methods:

i.

Using GAMBIT software [11][13].

ii.

Using an analytic approach based on the fact that the

the Nash Equilibrium points are also the points were

the following conditions hold:

3s5 (5 , u )

s5 (5 , u )

|u = 0

35

su (5 , u )

3su (5 , u )

|5 = 0

3u

(14)

(15)

Case I:

In this case the pay-off functions of operators A and B are

represented in Figure 6. Introducing this matrix in GAMBIT a

Nash Equilibrium point is found. This is marked in Figure 6.

By visual inspection of the 2 dimensional representation of the

pay-off functions (Figure 7 and in Figure 8) it is possible to

confirm this result.

Case II:

In this second case a new pay-off matrix was obtained by

changing some of the engineering parameters associated with

the network migration from ADSL to FTTx. This is

represented in Figure 9. The corresponding 2 dimensional

representations of the pay-off matrices (NPV of both operators

as functions of the tariff variation in a range of +0.5 to - 0.5

of the starting value being used) are shown in Figure 10

(Operator A) and Figure 11 (Operator B).

Now, in order to find the corresponding Nash equilibrium

points conditions (14) and (15) were applied. The joint

solution for this set of simultaneous equations corresponds to

the intercession of the derivatives of the 2 pay-off surfaces

depicted in Figure 10 (Operator A) and Figure 11 (Operator

B). (the intersection of these derivatives with the horizontal

plane are the reaction curves associated with each pay-off

function [12]). This intersection is depicted in Figure 16 and

the corresponding Nash Equilibrium point is identified.

Paper S1-2

Figure 13 Pay-off Derivative Matrix Operator A Case II

(tridimensional representation)

Figure 10 Matrix Pay-off Operator A Case II

(tridimensional representation)

Figure 11 Matrix Pay-off Operator B Case II

Figure 16 Intersection of Operator A and B Pay-off Derivative

Matrices (tridimensional representation)

This paper has presented an approach to the technoeconomic evaluation of investment projects where market

behavior and competition effects were modeled resorting to

system dynamics and game theory reasoning. This approach

provides new insights in this type of problems and differs

from what is conventionally done in the following aspects:

(i)

The presence of an operator in a market takes into

consideration the presence of other operators in a

dynamic fashion, influenced by a quality function

where parameters such as bandwidth, offered services,

tariffs and contention ratios are involved (instead of

being simply modeled by some kind of logistic curve

with initial and final penetration rates);

(ii)

Competing operators are evaluated not only in terms of

market shares but also in terms of economic results.

In order to validate the presented ideas, the approach has been

applied to some case studies. The engineering details of these

case have been duly accounted in the evaluation of the

associated pay-off matrices but are out of the scope of this

paper. The results illustrate the potential of the combined

system dynamics and game theory approach.

The present approach has also been used as a pedagogic tool

simulating a business environment in telecommunications

engineering capstone project classes; allowing activities such

as the following:

(i)

Market gaming around a set of business cases where

students are organized in teams playing different

professional roles (role playing);

(ii)

(ii) Linking the outcome of market gaming and

associated business cases with syllabus topics and

with practical issues, resorting to engineering

decisions that have to prepared based on technology

choices, network design, market simulation and

economic-financial analysis.

This pedagogic value has already been recognized by the

award of a prestigious international prize: "HP Innovations on

Education Grant"

VI. ACKNOWLEDGEMENTS.

The work reported in this paper has had the following

support:

i.

HP Innovations on Education Grant.

ii.

Project Redes de Nova Gerao-FTTh (New

Generation Networks - FTTh, led by CABELTE,

Cabos Elctricos e Telefnicos, S.A, and supported by

Sistema de Incentivos Investigao e

Desenvolvimento Tecnolgico (SI&DT) do Quadro de

Referncia Estratgica Nacional, Portuguese

Government and European Union funding.

iii.

Facilities provided by the University of Aveiro (P)

and by Institute of Telecommunications (P).

This support is deeply appreciated.

Paper S1-2

VII.

REFERENCES

[1] Borgar T. Olsen, Alcibiade Zaganiaris, Kjell Stordahl, L.

Aa. Ims, D. Myhre, T. Averli, M. Tahkokorpi, I. Welling,

M. Drieskens, J. Kraushaar, J. Mononen, M. Lahteenoja,

S. Markatos, M. De Bortoli, U. Ferrero, M. Ravera, S.

Balzaretti, F. Fleuren, N. Gieschen, M. De Oliveira

Duarte, and E. de Castro, Technoeconomic Evaluation of

Narrowband and Broadband Access Network Alternatives

and Evolution Scenario Assessment, IEEE JSAC, vol. 14,

no. 8, 1996.

[2] L. A. Ims, Ed., Broadband Access Networks

Introduction Strategies and Techno-Economic Evaluation,

Telecommunications Technology and ApplicationsSeries,

Chapman & Hall, 1998.

[3] K. Stordahl and L. Rand, Long Term Forecasts for

Broadband Demand, Telektronikk, vol. 2, no. 2/3, 1999;

http://www.telenor.com/telektronikk/,pp 4344.

[4] D. Varoutas et al., On the Economics of 3G Mobile

Virtual Network Operators, Wireless Pers. Commun.,

Springer, vol. 36, no. 2, Jan. 2006, pp. 12942.

[5] N. J. Frigo, P. P. Iannone, and K. C. Reichmann, A View

of Fiber to the Home Economics IEEE Commun. Mag.,

vol. 42, Aug 2004, pp. S16S23.

[6] B. T. Olsen et al, "Technoeconomic Evaluation of the

major Telecommunication Investment Options for

European Players " IEEE Network, vol. 20, no. 4, July

2006.

[7] S. Verbrugge et al., Methodology and input availability

parameters for calculating OpEx and CapEx costs for

realistic network scenarios, Journal of Optical

Networking, Vol. 5, Issue 6, pp. 509-520, 2006.

[8] T. Monath et al., Techno-Economic aspects of FixedMobile Convergence (FMC) opportunities based on the

MUSE project, in Proc. Broadband Europe 2007,

Antwerp, Belgium, December 3-6, 2007.

[9] M. Kantor K. Wajda B. Lannoo K. Casier S. Verbrugge

M. Pickavet L. Wosinska J. Chen A. Mitcsenkov,

"General framework for techno-economic analysis of next

generation access networks", 12th International

Conference on Transparent Optical Networks (ICTON

2010), Munich, Germany, 27 June - 01 July 2010, pp.

Mo.C4.2.

[10] The ECOSYS Project, http://optcomm.di.uoa.gr/ecosys/,

Deliverable 16.

[11] Dimitris Katsianis, Attila Gyrke, Rozlia Konkoly,

Dimitris Varoutas and Thomas Sphicopoulos, A Game

Theory modeling approach for 3G Operators

NETNOMICS:Economic Research and Electronic

Networking, Volume 8, Numbers 1-2 / October, 2007 pp

71-90 online Sep 2008, ISSN 1385-9587.

[12] Rasmusen, Eric (2006), Games and Information: An

Introduction to Game Theory (4th ed.), Wiley-Blackwell.

[13] McKelvey, R. D. (1997). An interactive extensive form

game program. http://econweb. tamu.edu/gambit/.

California Institute of Technology.

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