RESEARCH ON THE OPERATIONAL INTEGRATION

PROCESSING OF TELECOM OPERATORS

BASED ON GAME THEORY

Xiaoliang Wang and Zhongliang Guan

School of Economics and Management, Beijing Jiaotong University, Beijing, China

Keywords: Service convergence, Integration processing, Broadband services, Game theory.

Abstract: Referring to the Game theory, the paper gives a conclusion of China's telecom industry restructuring, and

analyze how to reserve advantage business in both sides and how to find the profit-maximizing strategy for

each side when they are merged together. In addition, the paper also analyzes the competition between

telecom operators and cooperation, and gives the corresponding recommendations based on the "Prisoner's

Dilemma" case study.

1 INTRODUCTION

China Telecom industry has a late start, as well as

it’s development history experienced large numbers

of reforms such as the separation of enterprise and

operators restructuring to establish a reasonable

market standard. After the telecom restructuring in

2004, there are six operators named China Telecom,

China Mobile, China Unicom, China Netcom, China

Satcom and China Tie Tong. However, the

development of telecom industry is unsatisfactory.

First, the mobile communications strongly impact

the two fixed operators, business income and

number of users decline each year. Second, the

process of grabbing the mobile market between

China Mobile and China Unicom is lack of effective

competition mechanism, resulting in the unnecessary

waste of mobile market resources, and bringing

losses to the country and industry. Therefore, the

telecom operators restructured again in 2008. China

Telecom acquired CDMA network of China Unicom;

China Unicom combined with China Netcom; China

Telecom acquired China Satcom's basic telecom

business; China Tie Tong combined with China

Mobile. Competition status of China Telecom,

China Mobile and China Unicom has formed finally,

and we called this status "the three pillars" pattern.

The restructuring will promote the competition

between operators, and is good to increase the

efforts to promote information products during the

time when the development of operators in the voice

business is slow down or even stagnated (Lv Xuehai,

2008). Currently the three major 3G operators have

begun to form their own marketing characteristics,

by providing differentiated products and producing

mix to form the competitive differentiation. It is very

favourable for the weak operator to adjust self-

location and improve the competitiveness.

2 RELATED WORK

There are a lot of documents analyzing the

companies merger and service convergence at home

and abroad. Yadong Luo utilized historical data to

analyze the integrated economic system which has

the formation of combining several economies, and

analyzed the interdependence and Games Relations

between the economies. He also pointed out some

major factors impacting the performance of the

economy strongly in the point of new institutional

economics and enterprise competitiveness (Yadong

Luo, 2008). Dai Rui analyzed the reasons and

motives of the business vertical expansion in

domestic telecom operators in the point of classical

economics, new institutional economics and

enterprise competitiveness, and attempted to study

the impact of the vertical expansion to the industrial

chain by game theory (Dai Rui, 2009). Through the

use of the diffusion model of network innovation,

Chunyan Li has also analyzed the development

prospects of the domestic telecommunications

444

Wang X. and Guan Z..

RESEARCH ON THE OPERATIONAL INTEGRATION PROCESSING OF TELECOM OPERATORS BASED ON GAME THEORY.

DOI: 10.5220/0003517204440448

In Proceedings of the 13th International Conference on Enterprise Information Systems (ICEIS-2011), pages 444-448

ISBN: 978-989-8425-56-0

 2011 SCITEPRESS (Science and Technology Publications, Lda.)

market, and given the profits of the enterprise

customers and market share before and after China's

telecom industry restructuring by the analysis of the

historical data (Chunyan Li, 2009). In addition,

domestic scholars are also studying the development

strategy after the restructing and analyzing the price

competition of the mobile industry by using the

knowledge of game theory. By now, they have

already proposed much more objective and effective

method.

Through the existing research results, we can

directly study the impact of the companies merger to

the market, or study the market expansion by the use

of game theory purely, or give some

recommendations with regard to the merger and

restruction of telecom operators. However, there is

no studying for the model of the parent company’s

business integration. The paper, based on the carrier

recombination as the background, using the game

theory as the weapon and taking broadband services

for example, will focus on the cooperative game in

the process of the integration of the parent

company’s business and the competitive game

between the telecom operators after the merger

(Qibin Xiong, 2009). Meanwhile, based on the

theoretical results, the paper has proposed a number

of advices and offered suggestions for the telecom

companies to develop harmonious and orderly

(Changsh liu,2007).

3 MODEL ANALYSE

Suggest A and B are respected as the domestic

Telecom operators, A' is the subsidiary company

combined with A. N

means the number of clients

who use the broadband services of A company at the

present stage. N

is total broadband customers of

company A'. Now, we can approximate suggest that

+ N

=const.

3.1 The Game between A' and A

As A convergenced with A', both of them are

completing their broadband services step by step. A

company have added the scale of purchase from

APRON and GPON, and set a large scale of net

dispose. However, A keeps investing and try its hard

to expand the group of client to benefit more. As the

merger of these two company, A' becomes A’s

individual subsidiary company, mainly supplies

regular comunication services, in face of limited

customer base, parent company and subsidiary

company share cross-promoting regions in the

business space. However, both sides must adhere to

the premise of a parent company to achieve a

common profit; it can reflect the significance of the

merger. Therefore, in the combination of parent and

subsidiary company in the broadband services

business, there is not only mutually exclusive but

also mutually complementary in business service.

Using game theory to find an optimal strategy in a

business combination will achieve profitability of

both overall.

Parent and subsidiary company’s payoff matrix

is shown in the table 1 below: (figures in parentheses

under the four-frame, A’s income before, B’s

income after)

Table 1: This caption has one line so it is centered.

Parent Company A

subsidiary

company

APON,

GPON

ADSL

APON,

GPON

, a

’) (a

, a

’)

ADSL (a

, a

’) (a

, a

’)

Obviously, the game of the parent and subsidiary

company in business choice is in the area of the

cooperative game, the two sides in the premise of

the group premise, choose the appropriate strategy,

and finally the overall interest increase, at least to

ensure that individual interests are not reduced

(Binzh Cheng, 2007). Cooperative Game study how

to distribute co-operation profit when cooperate

achieved, that is, issues of income distribution.

Cooperative game takes a collaborative approach.

Therefore, in accordance with the mother-child

relationship and the respective advantages of

broadband services based on, the two sides should

choose (a

’

) strategy, and this chosen will achieve

the Nash equilibrium.

Get the result of a

and a

’

by the following linear

programming:

max z=a3+a3'

3 ii

awx



awx



0a 

3 p

aT

In addition, X=(x

,L,x

), n∈N

means that several

factors affected the benefits of broadband services,

RESEARCH ON THE OPERATIONAL INTEGRATION PROCESSING OF TELECOM OPERATORS BASED ON

GAME THEORY

445

including service penetration, customer satisfaction,

product cost, infrastructure investment, quality of

network service and so on. These parameters can be

determined by the actual situation of operators.

Parent company A, the weight coefficient

corresponding to W=(w

,L,w

),n∈N

is used to

control the ratio among the impact factors. Similarly

'=(w

',w

',L',w

'), n∈N

is weight coefficients

corresponding to subsidiary company A

'. T

is the

average income in the aspect of broadband business

before the merger of parent company and

subsidiaries company.

3.2 The Game between A and B

A and B are two domestic telecom operators, each

owns not only its comparably mature service

systems and customer groups, but also advantageous

services. The telecom industry restructuring in one

hand accelerates company’s full service

development mode, in another hand further makes

direct competition between companies more

severely. As a result, in some services (here mainly

discuss APON&GPON) A and B directly compete

with each other. So an objective analysis of the

competition relationship in aspect of gaming is

described as follows.

Based on current infrastructure and service

quality, the key factor which determines user group

number is the price. A low price strategy surely will

attract more customers, and in a certain price level,

true “small profits, quick returns” will be achieved,

so as to maximize company profit. However, one

side’s lowering price will inevitably cause another

side to lower its own price, and then price

competition begins. In face of this dilemma, to find

the underlying cause using gaming theory and seek

the way to get out is a most necessity.

In modern economics, a classical example named

“Prisoner's Dilemma”, e.g. in a situation when both

sides cannot share information, each will choose a

strategy only to maximize its own profit, but the sum

of both added is lowest. In the opinion of game

theory, oligopoly companies often find themselves

in such dilemma, like prisoners, each competitor has

an impulse to betray others or lower its own price.

Though cooperation is attractive, but each

competitor has good reason to worry if it adopts a

mild strategy, others may make use of it and

occupies a large market share. Therefore, in

Telecom Industry, competition between A and B

often leads to a fierce and low-profit situation.

Facing this predicament, both competitors can

adopt a cooperation strategy like “ Lowest Price

Limit” or “Production limited price” (Qibin

Xiong,2009). The so called cooperation strategy, e.g.

companies in the same industry adopting consistent

behavior aimed at limiting competition, is collusion

in nature. “Price -fixing cartel” is a most common

one, Home Appliance Industry has such precedent

(Weifeng Ren, 2005).

In the gaming theory aspect, the two Telecom

operators can benefit much from cooperation.

Otherwise, betrayal will cause retaliation and no one

has the courage to get out of this relationship.

Therefore, under the circumstance when infinite and

repeat gaming is possible, cooperation can be

achieved. The meaning for A and B is, the

possibility of cooperation between them does exist.

First, in a predictable period of time, the competition

between A and B will last for a long time, and this

competition is almost like infinite and repeat

gaming. Consequently, concerning both sides’ long

profit, cooperation is a better choice in this game.

Second, government can interfere or set limit to

Telecom operators’ vicious price competitions.

4 RELATED SUGGEST TO

SERVICE CONVERGENCE

AND SPECIFICATIONS OF

OPERATORS COMPETITION

4.1 Recommendations to Integration of

Parent Company and Subsidiaries

As China Mobile merged with China Tie Tong fixed

network for instance, the following comes several

recommendations in the respect of broadband

services convergence:

Consider about the big difference between

Mobile broadband and fixed broadband in the

respect of user habits, traffic model, routing strategy,

the affordability of quality of service, and the factors

in telecommunications policy regulatory, the recent

suggestions come as following:

Maintain the two existing business network,

CTTNET for fixed broadband services, and CMNET

for mobile internet services.

 Nodes of China Mobile in the area of Hong kong

share with China Tie Tong;

 Expand the core node level bandwidth of China

Tie Tong and China Mobile’s backbone Internet;

 Build provincial level Internet links to achieve

sharing the contents of the two net in province , as

well as the resource of provincial export bandwidth;

ICEIS 2011 - 13th International Conference on Enterprise Information Systems

446

 IDC of the two operators both access to the two

net in AS-model simultaneously ， and achieve

comprehensive resource sharing of IDC;

 Utilize the QoS strategy deployment of existing

CTTNET network resources to meet the rapidly

growing VPN business for large customers;

 After the deployment of MPLS VPN in CMNET,

CTTNET can support for MPLS VPN users with

backup channel in order to improve the security of

client networks

The advantages of sub-network for carrying fixed

and mobile services in the following:

 Fixed and mobile traffic routing sub-network

organization and implementation of control

strategies, ease of maintenance management and

business organizations;

 In the case of MPLS VPN PE undeployed in

CMNET currently, the CTTNET of China Tie Tong

can provide VPN services quickly to meet the needs

of enterprise customers;

 Because of being dominated by real-time traffic

services and P2P services, and bandwidth is in hare

demand, the fixed broadband services, which has

obvious characteristics of busy periods and high

requirements to user IP address, sub-network

carrying fixed and mobile broadband services, can

avoid the telecom regulatory policy risk better, and

avert complaints from other operators.

4.2 Recommendations for Long-term

Integration

 Make differential positioning of two nets, one for

high-level customers as a high-quality network,

which can provide comprehensive data for high-

level business services, and provide national MPLS

VPN service with assurance of QoS quality; while

the other net provide Internet business to normal

users;

 With the deepening of network convergence,

broadband user authentication system and DNS

system are being built and unified step by step.

4.3 The Relevant Proposals for

Operators Competition

Reference to "prisoner's dilemma", we can find

unlimited game make the cooperative behaviour

possible. After unlimited game, the two sides must

be able to find common points of interest. Under

certain conditions, the two sides can choose

cooperation way to solve the problem. Therefore,

cooperation between competitors is possible, and

both can get benefit. At the present time, domestic

telecomm are still in face of the situation that usually

called "the three pillars". The pricing strategy among

the three operators is going on endlessly, instead two

dominated the mobile market over past. At present,

any actions attempt to change the market price of re-

shuffling unilaterally are unrealistic in the condition

of maturing market. Fighting for the market share is

a zero-sum game. There must be a loser while

somebody wins. But the pursuit of profit is a

positive sum game which can achieve a win-win

through cooperation. For China telecom operators,

the competitive strategy should be changed, get out

of the endless price war and create a significant

competitive advantage in some section of the value

chain.

It’s the best way to build different modes of

operation, focus on direction of brand, compete with

the brand and make a head start in the brand

competition for China’s mobile operators. For

example, “Tianyi” 3G Series which launched by

China Telecom at present occupied the emerging

market which put students as potential customers,

won a place in the field of wireless communications

for China Telecom after getting a mobile network

license for the first time.

Rational competition and cooperation is needed

to deepen reform of system for the situation of China

Telecom. Extensive cooperation between operators

can fully exert the performance of communication

networks and improve the efficiency of

communication networks resources. It also can

expand market share together and improve

economies of scale to get out of the trouble of

“prisoner’s dilemma” and to achieve good vision of

win-win.

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GAME THEORY

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