Research on Price Elasticity of Demand for Telecom

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Research on Telecommunications pricing
Research on Telecommunications pricing

Prepared By:
Mina Ibrahim

Prepared By:
Mina Ibrahim

Contents
Contents1
Executive Summary2
Theoretical Background3
The Theory of Price3
The Demand Function3
The Demand Function for Telecom industry4
The availability and price of Substitutes & Complements4 Research Background6
The Egyptian Scenario6
The Egyptian Company for Mobile Communications (Mobinil)7
Important Milestones7
Mobinil Market Position9
Research Analysis and Results10
Quantity Demand Analysis10
Cross Demand Function11
12
Regression Analysis13
Research Conclusion16

Executive Summary

Telecommunication is a fast growing industry which is promising its investors secured and growing revenue due to its important in every person’s life and day to day activities.

In particular, mobile telecommunications has been a new entrant to the industry. Starting in late 1990s mobile telecommunications achieved a huge growth in a small period of time. The ability to perform calls in any location to any required destination has been accepted and motivated by the users. The advance in technology has made the mobile products highly available to the public with different price ranges that vary based on the functionality and features produced.

On important aspect we will be discussing in this document is the minute rate pricing schema adopted by various operators in Egypt. Pricing has been and will be one of the most important aspects in any business and especially for service providers such as telecom operators.

There are two major categories in which pricing can depart from marginal costs as per Armstrong (Armstrong, 2001)

1. The problem caused by fixed and common costs, setting all the prices equal to the marginal costs will not allow the operator to break even 2. Pricing is usually determined in some ad hoc manner and may not reflect the costs at all, depending on that profits from one market may subsidize the other

The second point is mainly evident in different pricing schemes applied in the Egyptian market. The literature will be discussing various factors affecting the pricing and will be proposing a way in order to effectively determine the pricing that will achieve profit maximization by increasing the gap between the marginal costs and the marginal revenue.

Figure 1 Profit Maximization Theory

Theoretical Background
The Theory of Price

The theory of price is an economics theory that provides the optimum price for a certain good or a service based on the supply and demand forces. In that theory, each force is studied in details and various factors are combined through regression analysis in order to find the optimum price in which supply and demand are equal to reach the market equilibrium. The Demand Function

Demand is the quantity of a certain commodity the consumer is willing to buy at a certain price in a certain period.

The demand function of a certain good or service is the relationship between the price of the good or service and the amount of it that consumers are willing and able to purchase at that given price.

Mathematically the demand function can be stated as follows

Dx= f(Px, Ps, Pc, I,T)
Where
Dx = Demand for commodity X
Px = Price for commodity X
Ps = Price for Substitutes goods of X
Pc = Price for complementary goods of X
I = Money Income
T = Qualitative factor of taste
In the mobile communications market substitutes can be described as fixed line communication and voice over IP communication through the internet such as Skype & Magic Jack On the other hand complementary goods are replacements of the mobile calls such as short text messaging (SMS) and Blackberry messaging (BBM). Taste is another important factor that affects demand on the mobile phone usage. A recent incident occurred with one of the largest mobile operators in Egypt Mobinil, in which the former...
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