Market Analysis of Mobile Handsets Subsidies

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Market Analysis of Mobile Handsets Subsidies
Fawzi Daoud, Heikki Hämmäinen Networking Laboratory Helsinki University of Technology P.O. Box 3000, FIN-02015 HUT, Finland {daoud@netlab.hut.fi, heikki.hammainen@hut.fi)

Abstract Subsidies are a widespread practice to allow consumers to get their mobile handsets at deep discount, or even for free. Recently, with 3G and subsequent requirements on sophisticated and costly handsets, subsidies are being reconsidered both in subsidized and non-subsidized markets. In this paper, we analyse the requirements for subsidies with respect to economic efficiency. Using a simplified analytical model with linear demand and supply we illustrate the relationship of subsidies with market factors such as penetration rate, churn rate, country type (developed/developing), and charging type (prepaid/postpaid). Korea, Japan, Finland, and the UK are chosen as case markets since they represent different strategies for handsets subsidies. Our main conclusion is that consumer subsidies, either government- or operator-funded, can be economically efficient from the national viewpoint when applied for faster adoption of a specific technology at the right time window in a temporary manner. Keywords Mobile handsets, mobile markets, elasticity, penetration 1 Definition of subsidies

There is no widely accepted definition of what constitutes a subsidy. However, according to the World Trade Organisation (WTO), a subsidy contains three elements: (i) a financial contribution (ii) by a government or any public body within the territory of a member (iii) which confers a benefit. Generally on the international level subsidies are thought of as cash payments from a government to a producer or consumer, but subsidies may appear in many formats (see Table 1). Some have a direct effect on price, like grants and tax exemptions, while others act indirectly, for example, through regulations that bias the market in favor of a government-sponsored technology.



References: [1] Korea Case Study, report 2004, http://www.itu.int/osg/spu/ni/futuremobile/general/casestudies/koreacase-rv4.pdf [2] Japan case study, Report 2004, http://www.itu.int/osg/spu/ni/futuremobile/general/casestudies/JapancaseLS1.pdf [3] ITU Workshop on Shaping the Future Mobile Information Society, http://www.itu.int/osg/spu/ni/futuremobile/index.html [4] Finland case study, http://www.itu.int/osg/spu/ni/fmi/casestudies/finlandFMI_final.pdf [5] Mobile issues, Oftel, UK, http://www.ofcom.org.uk/static/archive/oftel/ind_info/network_inter/mobile.htm 18(18) ITS 2004, Berlin, Sep 4-7, 2004

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