Changes in telecommunications Emerging technologies are affecting - PowerPoint PPT Presentation

Changes in telecommunications Emerging technologies are affecting telecom industries � Computers are now capable of hearing, speaking, seeing � Portable computing: mobility and wireless communication � Optical technologies: no bandwidth limit � Intelligence across a wider range of devices: pervasive computing , or � ubiquitous computing From human-to-human communications to an era of machine-to- � machine communications New traffic patterns, different requirements for quality of service � Professor: C. Courcoubetis New types of applications: digital entertainment, streaming, e- � commerce, m-commerce http://www.aueb.gr/users/courcou Telecom MBA Prof C. Courcoubetis Basic Economics - 2 Network convergence Questions In the new public network: from narrowband to a broadband world � � Over-dimensioning of networks? From single media to multimedia � � Where will congestion exist? Data used to run over a network that was largely built for voice � � How should future applications be priced? From a fixed environment to a mobile environment � � How will the Internet evolve? Convergence: the PSTN, the Internet, wireless, broadcast networks, cable � TV, are all coming together to service the same sets of traffic and to deliver � What is the price of non-cooperative networking? the same types of features and services � How can the future Internet by business model neutral? Convergence occurs in network services, devices, applications, industries, � � Power of position in the value chain? humans and machines � New business models for network operators? Current Internet was not build for multimedia distribution, assumed � cooperation � What is the impact of GRID, p2p,…? Economics dictate the direction of innovation � � Business models for Google, Amazon, …? Telecom MBA Prof C. Courcoubetis Basic Economics - 3 Telecom MBA Prof C. Courcoubetis Basic Economics - 4

Economics = incentives Course outline Basic economic concepts 1. = + + w a bT cX Microeconomic models, competition, pricing, cost recovery, lock- � The taxi tariff � in, externalities, price differentiation Markets for communication services 2. Basic concepts of communication services � � The “all-you can eat” restaurants: flat vs usage-based Internet value chain � New technologies and their effects to the market 3. The effect of signaling services to business models � The Internet café tariff: dynamic pricing � VoIP, SIP, ENUM, IMS � Internet regulation � � Pricing a single link The inadequacy of the current Internet 4. what are the problems with the current internet � ideas about its evolution � NGN � The telecommunications market today 5. discussion of competition in the communications services market � Telecom MBA Prof C. Courcoubetis Basic Economics - 5 Telecom MBA Prof C. Courcoubetis Basic Economics - 6 Basic Economics - Outline Basic Economics � The consumer � Networks and positive externalities � The producer � Game theory � The social planner � The information economy � Market mechanisms and competitive equilibria � Pricing in communication networks � Marginal cost pricing and cost recovery � Externalities and congestion pricing � Market competition � Lock-in Telecom MBA Prof C. Courcoubetis Basic Economics - 8

The context The consumer � Communication services are economic commodities � Demand factors: amounts of services purchased by users � utility of using a service, demand elasticity � Supply factors: amounts of services produced � technology of network elements, service control architecture, cost of production � Market model: models interaction and competition � Prices: control mechanism � control demand and production, deter new entry � provide income to cover costs � structure and value depends on underlying model Telecom MBA Prof C. Courcoubetis Basic Economics - 9 The consumer’s problem The demand curve � Consumers: The demand curve: = x ( p ) quantity demanded at price p u ( x ) � utility function increasing, concave = $ CS ( p ) CS p ( ) consumer surplus at price p − � consumer surplus ( net benefit ): u ( x ) charge for x = + u ( x ) CS ( p ) px D ( p ) � solve optimisation problem (linear prices): u ′ p ( x ) u ( x ) = value of consuming x $ = − x ( p ) : arg max{ u ( x ) px } px − u ( x ) px px = x : u ' ( x ) p � at optimum x x ( p ) $ p x x ( p ) u ' x ( ) = − p ( x ) x ( p ) : arg max{ u ( x ) px } Demand curve x Telecom MBA Prof C. Courcoubetis Basic Economics - 11 Telecom MBA Prof C. Courcoubetis Basic Economics - 12

Elasticity ∂ x / x ε = The producer CS p ( ) i i $ Elasticity of demand : ∂ i p / p i i u ′ p ( x ) ∂ px x x / ε = i i Cross-elasticity: ij ∂ p p / x ( p ) x j j -> Complements, substitutes inelastic $ elastic x Telecom MBA Prof C. Courcoubetis Basic Economics - 13 The producer’s problem The producer in a competitive market > ⎧ c ( y ) 0 if p p � Producer: cost function ⎪ = = Competitive market ⎨ D ( p ) any amount produced if p p � profit function ( producer surplus ): p ⎪ with price : ∞ < ⎩ if p p π = − ∈ ( y ) yp ( y ) c ( y ), y Y − = max py c ( y ) for p p Producer solves: Demand curve p ( y ) y − max [ p ( y ) y c ( y )] Monopoly: ∈ c ( y ) y Y $ py y − max [ py c ( y )], for given p Perfect competition : ∈ = y Y c ' ( y *) p + − max [ p ( y z ) y c ( y )] Oligopoly: ∈ y Y p fixed p , produce y=y ( p ) p Regulation: * y y Telecom MBA Prof C. Courcoubetis Basic Economics - 15 Telecom MBA Prof C. Courcoubetis Basic Economics - 16

The social planner’s problem The social planner − ⇔ max u ( x ) c ( x ) x ∂ ∂ * * u ( x ) c ( x ) = = MC ∂ ∂ x x i i − u ( x ) c ( x ) $ u ' p c ' c ( x ) x ( p ) Telecom MBA Prof C. Courcoubetis Basic Economics - 18 Maximising efficiency Competitive equilibrium • Every participant in the market is small, can not affect prices Simple case: constant marginal cost • Equilibrium: stable point where production = demand, price p $ MC = marginal cost of x consumers producers c Net social gain − − j max u ( x ) px y py c y max ( ) u i i i j j j j x j p x i y i i p j i MC MC opt u ( 1 x ) x ∑ ∑ Cost of = x ( p ) y ( p ) 1 Market clearance : i j i j ∂ ∂ c u ∑ ∑ = = ⇔ − j x x x i x p max u ( x ) c ( y ) 1 opt ∂ ∂ i i j j x y { x , y } i j i j i j ∑ ∑ ≤ “Invisible Hand” Theorem: s . t . x y Set prices = marginal cost i j => Social welfare optimum! i j => Reached by tatonnement Telecom MBA Prof C. Courcoubetis Basic Economics - 19 Telecom MBA Prof C. Courcoubetis Basic Economics - 20

Capacity constraints Dimensioning of the network Total amount of resource available = C � � Prices at the equilibrium can play the role of “signals” for Maximization problem: � increase or decrease of the required network capacity C ∑ ∑ ≤ max u ( x ) s . t . x C ( 1 ) i i i { x } i i i mc If the marginal cost of C is , p Define a market: find the clearing price such that � > mc ⇒ p decrease of C ∑ < mc ⇒ = C x i ( p ) (2) p increase of C The “Invisible Hand” Theorem: under the market clearing price we � achieve the optimum in (1) = − x ( p ) : arg max{ u ( x ) px } Note: each user solves: � i i p = shadow cost of capacity � Telecom MBA Prof C. Courcoubetis Basic Economics - 21 Telecom MBA Prof C. Courcoubetis Basic Economics - 22 Strategy issues x i ( p ) � Why should users respond truthfully their ? Pricing � it may be profitable to cheat! � In a case of 2 unequal users, the large user may pretend Marginal cost pricing and cost he is small recovery $ u 1 x ( ) p net benefit of user 1 if truthful px net benefit of user 1 if he pretends he is like user 2 u 2 x ( ) − ε x C / 2 C Telecom MBA Prof C. Courcoubetis Basic Economics - 23