Service provider’s subsidy policy has not been extensively studied so far, although many experts agree that it has been playing an important role in the rapid growth of Korean mobile telecommunication industry. This paper presents an agent-based model of Korean mobile telecommunication supply network and investigates the effect of subsidy on service provider’s market share. Major players included in the model are service providers, wholesalers and retailers.
In our model, a service provider chooses how to pay its subsidy to wholesalers. The first alternative is to lower or raise basic prices of handsets based on the fluctuations of its market share. The second one is quantity discounts to wholesalers with good performance as a way of sales incentive and the third one is to use both.
Wholesalers decide the handset price charged to the retailers in response to their own service provider’s subsidy scheme. There are two stylized pricing mechanisms used by the wholesalers. One is imitating neighbor wholesalers’ average prices and the other is searching for one’s own optimal prices. The retailers react to the wholesale prices offered and choose their own wholesaler.
The result of the agent-based simulation experiments indicates that the market share of a service provider increases with quantity discounts. But when there is severe price competition between service providers, quantity discounts have no effect. Then, the probability of imitation of wholesalers has an influence on the market share of service provider. The higher the probability of imitation of wholesalers which belongs to one service provider, the more market share of that service provider increases.
The model developed can serve as a valuable tool for service providers to formulate their subsidy decision in different pricing pattern of their wholesalers.
