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CTTE 2011 16-18 May, 2011, Berlin, Germany

Paper S1-2

Market Modelling in Access Networks: an approach


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
#

University of Aveiro, Department of Electronics, Telecommunications and Informatics


*

Institute of Telecommunications
Aveiro, Portugal

E-mails: duarte@ua.pt; hsfelix@ua.pt; anm@ua.pt; a30385@ua.pt; saracoelho@ua.pt


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

jeopardises some of the promises of the so-called "Next


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.

II. SYSTEM DYNAMICS


The ideas behind this approach have been influenced by [10]
and are explained ahead resorting to the following example:

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CTTE 2011 16-18 May, 2011, Berlin, Germany

Consider a geographical area where a set of N


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

# () = # ( 2 3) + 3#5 ( 2


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

! is a parameter that determines how early or how

" is a parameter that determines how fast the market

The incremental term of this equation, 6# ( 2 3)


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, )]

late the market starts to adopt the technology;

Equation (5) can be written as

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

and
#( 2 6) ==

adopts the technology, once it starts.

(6)

% # 8 ()
% # ()

is the average weighted market share.


x

The ratio

6# ( 2 6)
#( 2 6)
6$ ( 2 6)
$( 2 6)

can be interpreted as the market share elasticity


function of operator O9 relative to its quality:
6# ( 2 6)
#( 2 6)
= ;& ()
6$ ( 2 6)

(7)

$( 2 6)

In this work this function will be assumed to have a


constant value over time:

Figure 1. Typical market evolution in time


x

Assume that at the beginning of the market process


(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)

Define Relative Quality of Operator  at instant t


as:
$. ()
& (*)
$- () = ' $-. = ///////
(3)
&(*)
$()

For each operator , for time increment t to t+dt , market


share changes can be described by the following set of
dynamic equations:

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6# ()
= ;& () = ;&
6$ ()

(8)

The term 6$ ( 2 6) is defined as being the


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)

Substituting equations (9) and (7) in equations (5)


and (4) yelds:

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

(10)

Assuming a specific market share distribution at the


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.

CTTE 2011 16-18 May, 2011, Berlin, Germany

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) + 6# ( 2 6).- () =


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

(11)

Combining the resulting market share evolution in time


with the logistic curve depicting the adoption of the
technology/service by the market the end result becomes as
shown in Figure 3.

Initial Market Share

{# (0)},

 [1, 3)]

70%
7%
23%

Figure 3. Example of Market Share Evolution for 3 Operators


(with technology/service adoption effects incorporated)

Figure 2. Example of Market Share Evolution for 3 Operators


(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:

$=

The model was further enriched relative to [10] by


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

ntecs - number of adopted technologies;


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

 relative weight attributed to the degree of occupation of


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.

III. A PRACTICAL EXAMPLE


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:

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CTTE 2011 16-18 May, 2011, Berlin, Germany

Paper S1-2

Initial Market Situation


Operator A
N of users

90.000

Initial Installation Tariff


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%

These conditions are assumed to be kept constant for


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)

In order to attempt finding an answer to this question


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).

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CTTE 2011 16-18 May, 2011, Berlin, Germany

Paper S1-2

A simple willingness to pay function was adopted:


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

no plq(**r)m
8

) (13)

Figure 6 Pay-off Matrix of Operators A and B - Case I

Figure 5: Willingness to pay function

A. IMPLEMENTATION OF THE GAME


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.

Figure 7 Matrix Pay-off Operator A - Case I

Tariff variations were considered in a range of +0.5 to - 0.5


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)

B. RESULTS AND DISCUSSION


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.

Figure 8 Matrix Pay-off Operator B - Case I


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.

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CTTE 2011 16-18 May, 2011, Berlin, Germany

Paper S1-2

Figure 9 Pay-off Matrices of Operator A and Operator B Case II


Figure 13 Pay-off Derivative Matrix Operator A Case II
(tridimensional representation)

Figure 14 Pay-off Derivative Matrix Operator B Case II


Figure 10 Matrix Pay-off Operator A Case II

Figure 15 Pay-off Derivative Matrix Operator B Case II


(tridimensional representation)
Figure 11 Matrix Pay-off Operator B Case II

Figure 12 Pay-off Derivative Matrix Operator A Case II


Figure 16 Intersection of Operator A and B Pay-off Derivative
Matrices (tridimensional representation)

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CTTE 2011 16-18 May, 2011, Berlin, Germany

V. CONCLUSION AND FUTURE DEVELOPMENTS


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.
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[9] M. Kantor K. Wajda B. Lannoo K. Casier S. Verbrugge
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[10] The ECOSYS Project, http://optcomm.di.uoa.gr/ecosys/,
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[11] Dimitris Katsianis, Attila Gyrke, Rozlia Konkoly,
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