Capacity Allocation and Pricing Strategies for New Wireless Services

Indoor cell phone users often suffer poor connectivity. One promising solution to this issue, femtocell technology, has been rapidly developed and deployed over the past few years. One of the biggest challenges facing femtocell deployment is the lack of a clear business model. This study investigates the economic incentive for cellular operators (also called macrocell operators) to enable femtocell service by leasing spectrum resources to independent femtocell operators. We model the interactions between a macrocell operator, a femtocell operator, and end‐users as a three‐stage dynamic game, and derive the equilibrium pricing and capacity allocation decisions. We show that when spectrum resources are very limited, the macrocell operator has more incentive to lease spectrum to the femtocell operator, as femtocell services can help cover more users and improve the utilization efficiency of the limited spectrum resource. However, when the total spectrum resource is large, femtocell service offers significant competition to macrocell service and, as a result, the macrocell operator has less incentive to enable femtocell service. We also show the impact of the additional operational costs and limited coverage of femtocell service on equilibrium decisions, consumer surplus, and social welfare.