Game-theoretic understanding of price dynamics in mobile communication services

In mobile communication services, users wish to subscribe to high-quality service at a low price level, which leads to competition between mobile network operators (MNOs). The MNOs compete with each other by service prices after deciding the extent of investment to improve quality of service. Unfortunately, the theoretic backgrounds of price dynamics are not known to us, and as a result, effective network planning and regulative actions are hard to make in the competitive market. To explain this competition in more detail, we formulate and solve an optimization problem applying the two-stage Cournot and Bertrand competition model. Consequently, we derive price dynamics that the MNOs increase and decrease their service prices periodically, which completely explains the subsidy dynamics in the real world. Moving forward, to avoid this instability and inefficiency, we suggest a simple regulation rule, which leads to a Pareto-optimal equilibrium point. Moreover, we suggest regulator's optimal actions corresponding to user welfare and the regulator's revenue.