About a Dilemma in the Telecommunications Sector: VirtualOperators or Low-cost Operators?

Abstract

A virtual operator is fragile when it is in
competition with other virtual operators. This is explained by the
“Bertrand paradox”: when firms sell products not differentiated (or
not enough differentiated) a price war has terrible consequences
(the profits tend to zero). But it is worse if there is a price war
between the operators with a network. It occurred in France during
the period 2012 – 2018. The entrant Free triggered a price war. The
reaction of the incumbents was to create low-cost operators which
were their branches. The only virtual operator with a large size,
Virgin Mobile, was “bought and closed down” by the incumbent
SFR. It suffered too much because of the incumbents decreasing
their prices and the low-cost operators, both. It lost many
customers. One proposes a model to explain why the “buy and
close down” of Virgin Mobile was profitable (and chosen) in these
conditions. The method used is Bertrand competition.
Also, the “buy and close down” which is profitable is a criterium
for products which are not enough differentiated. A few examples
are given.
The aims of the paper are two:
- To study how works a price war in telecommunications.
- More generally, the possibility of profitable “buy and
close down” allows to propose a criterium for saturated
markets. Even, the criterium could be used to build
software (to test if a market is saturated or not). The rival
models which are presented in the literature are
commented.