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Analysis of the U.S. Wireless Service market

In our daily lives, we are familiar with the four biggest wireless service carriers: AT&T, T-Mobile, Sprint and Verizon. After learning the techniques of analyzing a matching market, I realize that the Wireless Service Market can be modeled by a preferred-seller graph, in which the carriers are the sellers of the services and millions of mobile phone and data users, including me, are the buyers in the Market. However, unlike the simplified model that we analyzed in the lecture, the Wireless Service market is dynamic and can be changed by the decision of each buyer or seller, which makes it even more interesting.
The first article I cite talks mainly about the auction of mobile spectrum. Recently, because of the high demand of Wireless broadband access, the Federal Communication Commission (FCC) decided to purchase a portion of broadcast spectrum used by television stations and conduct an auction to sell the spectrum to wireless service carriers. Winning the auction gives the winner the right to broadcast and transmit signals in a specific range of frequencies.
In this second-priced, sealed-bid auction, the carriers are bidders and the bidder with the highest bid will win and pay the price of the second-highest bid. The auction greatly encouraged all carriers in the business to participate, especially the small carriers. Without the auction, the small carriers simply don’t have the access to purchase the critical low-band spectrum, while more famous carriers, such as the four mentioned above, will have more opportunities to get the spectrum they desire. However, as we learned, the sealed-bid auction can give small carriers a fair chance, because the participants of the auction have equal chance of getting the item, the only parameter is their bids. By conducting the auction, FCC took its first step to encourage small carriers to enter the market and discourage the formation of monopolies.
Then, how do carriers with fewer customers compete with more powerful ones in the market? How does the competition affect the market as a whole? The second article I cite answers these two questions with an example. After losing a large number of prepaid customers to its competitors, Sprint launched its “Family Share Pack” plan, which offers the lowest family plan base price. As we analyzed in class, the payoff of a buyer equals his/her valuation of the item minus the price of the item. If the price drops, the buyers will have larger payoffs with the same valuations. Since all buyers want to maximize their payoffs, the item will be more attractive to the buyers. So by lowering the price of its plan, Sprint clearly desires to win customers back with the cost of earning less profit from the new subscribers.
However, how does its move affect the overall market? As a result, this move put more pressure on the market-clearing price of wireless services and increases the cost of Sprint’s competitors as they try to differentiate themselves. Why is it the case? First, we know that for any sets of buyers’ valuations, there exists a set of market-clearing prices. So in the Wireless Service market, a set of market-clearing prices must exist. Also, we know that a set of market-clearing price and a perfect matching in the resulting preferred – seller graph produces the maximum possible sum of payoffs to all sellers and buyers. So, as Sprint’s plan becomes more attractive, some buyers may switch to Sprint from another carrier. Then, we will not be able to have a perfect matching anymore and the old set of market-clearing prices won’t be market-clearing anymore. Also, as Sprint steals customers from its competitors, it forces its competitors to lower the prices of their plans, so that the buyers will have a larger payoff for their plans as well. However, lowering the prices of their plans also costs Sprint’s competitors to lose some of its profit from each buyer. As a result, the new market-clearing price will be lower than the old one as the carriers try to differentiate themselves from their competitors by lowering their prices.



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October 2015