Buisness Strategy- Case study of Airtel and reliance in India

University Degree Business and Administrative studies

Introduction

Game theory is a systematic study of strategic interaction among rational individuals. It can also be said as a Study of ways in which strategic interactions among rational players produce outcomes with respect to the utilities of those players, none of which might have been intended by any of them

It is the mathematical analysis of a conflict of interest to find optimal choices that will lead to desired outcome under given conditions. Game theory attempts to study decision-making in situations where two or more intelligent and rational opponents are caught up under conditions of conflict and cooperation.

Game theory was generally developed by von Neumann & Morgenstern’s in 1944.It may at first seem hidden to involve mathematics in something that seems purely based on skill and chance, but game theory inreality a complex part of many branches of mathematics including set theory, probability and statistics, and plain algebra. This results from the fact that games are dictated by a given set of rules that can be used to summarize a set of likely move which can be ranked by desirability and success, and with information available, such a set can also be constructed for the opponent, thus allowing predictions about the possible outcomes within a certain number of moves with a probabilistic accuracy.

Game theory’s main approach is to determine a rival’s most profitable counter strategy to one’s best moves and to plan the right defensive measure. Game theory helps the firm or individuals in determining the best course of action in the view of the expected countermoves from the competitors. The most controversial, assumption of game theory is that individuals or firms are rational.

Prisoner’s Dilemma

The prisoner’s dilemma is the prominent example of a game with a unique Pareto-inefficient Nash equilibrium. The main characteristics of this game is that there are substantial gains that could be attained through co-operation, non cooperation is dominant for every player in the game. The prisoner's dilemma is a problem in game theory that demonstrates why two people might not cooperate even if it is in both their best interests to do so. Prisoner's dilemma forms a non-zero game in which two players may each cooperate with or defect from (betray) the other player. The prisoner’s dilemma applies to various ranges of economic and political activities. Varian, 2003 say’s “the original discussion of the game is from a situation where the two prisoners who were involved in the same crime, were questioned in separate room”. When the players involved in the prisoner’s dilemma exhibit their dominant strategy, the outcome produces a payoff for each player which is less than the other.

Nash Equilibrium

The idea of equilibrium strategies which is one of the fundamental principles of game theory was developed by John F. Nash, Jr. called Nash equilibrium.

Nash (1950b) formally defined “equilibrium of a noncooperative game to be a profile of strategies, one for each player in the game, such that each player's strategy maximizes his expected utility payoff against the given strategies of the other players”.

The Nash equilibrium is an action vector from which no player can profitably unilaterally deviate. The important aspect of Nash Equilibrium is that each strategy in it is the best reply to the strategies of the other players in the game.

Game Theory in Mobile Industry- A Case of Airtel and Reliance

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Game Theory in Mobile Industry- A Case of Airtel and Reliance

Strategy plays a crucial role in managing any successful business. To formulate successful strategies, one needs to understand the competitors’ state of mind. Game theory is a tool primarily used to solve multi-personal decision problems. Oligopolies like mobile communications industry, with typically 3 to 6 operators, provide ample opportunities to use game theory in solving such problems. The dynamics of this industry provides enough possibilities for the application of game theory. Here is one such case of India’s top two dominant operators Bharti Airtel Ltd and Reliance Infocomm Ltd. Airtel and Reliance are engaged in a pricing war to capture more subscribers and acquire more market share. To achieve this they have implemented various calling rate plans and provided service in broadband and Digital TV with low-cost price strategy.

Bharti Airtel Ltd and Reliance Infocomm Ltd

The cellular phone industry is one of India's rapidly growing industries. Since the industry came into being in the mid 1990s, its average per annum growth rate has been a phenomenal 85 percent. The National Telecom Policy 1999 was an important landmark in the development of the cellular telecom industry in India where the rules of the game changed; the tariff rationalization and policy regulation introduced in the Policy helped the industry growth.

In March 2007, Reliance Infocomm started to roll out handsets in their prepaid mobile services segment to its customer from a price of Rs.3,500 for a CDMA enabled Motorola handset, a subscriber could get a free Reliance India Mobile (RIM) prepaid connection and recharge vouchers worth Rs. 3,240. This connection was valid for six months with a grace period of another six months during which the subscriber could receive SMS and incoming calls without having to recharge the account. This strategic offer was made on other RIM handsets as well. If a subscriber purchased an LG handset worth Rs. 6,500, the customer can get a free RIM prepaid recharge voucher worth Rs. 6,480 valid for six months. The prepaid subscription offers were seen as a radical step towards making communication and data services affordable to a wider range of customers.

In a major shift in strategy, Bharti Airtel too joined the race, to bundle out Nokia 1290 handsets on 22 June, 2007. Bharti Airtel is set to bundle handsets with mobile connections which means that the company will provide a handset with a new connection at partly subsidized rates with recharge price options ranging from Rs 300 to Rs 3,000 with no strings attached and being simple to operate.

Airtel followed this with yet another strategic move “Airtel Freedom plan” with 1paisa/second for its local and STD calls in its prepaid plans. To counter this Reliance came up with “Simply reliance -Pay per minute” with 50 paisa per minute for its local and STD calls.

Lifetime plan and Reduction of ISD and Roaming rates:Airtel introduced its first lifetime plan with installment plan to attract the lower and middle class persons with Re 1 per minute call charges which was later on followed by Reliance. Right now Reliance had introduced lifetime plan in 199 with 99 paisa per minute which will lead to cost leadership.

In September 2007, Bharti Airtel dropped its ISD charges to the US and Canada after which an Airtel mobile user could call at Rs 1.99 per minute with the Airtel STD and ISD Calling Card worth Rs 2,245. Reliance Infocomm also cut its rates to the US and Canada to Rs 1.99 per minute on its 'Reliance Global Call Card' of Rs 1,900. It had recently cut call charges to the Gulf to Rs 6.99 per minute implementing same strategies as done by the rival company Airtel.

Pricing is a crucial element for both Reliance and Airtel in mobile communications market, which could make and break their business. While under-pricing could lead to a loss for them, over-priced services may well see them losing their customer and the shares falling. By rolling out increasing number of services in today’s mobile market and pricing them has been a great challenge for both Airtel and Reliance. The pricing war game between these two is played in order to maximize the profit over the other by increasing the amount of sales and acquiring more shares in the market. Here Game theory helps both the firms to identify the dominant strategy, respective to each company’s service sales. Here the dominant strategy for both firms is to have low-cost calling rates.

In game-theoretic terms, the price war between these two giants of mobile market in India can be modeled as a multi-stage game with complete and imperfect information. Here Both Reliance and Airtel have used low-price strategy which can be linked to the prisoner’s dilemma of game theory. Prisoner’s dilemma was effectively used to successfully minimize the rates.

Airtel used game theory strategy in almost all service provided and they followed the same when it started to rollout its broadband service with various price rates where it outplayed it closest rival reliance in the broadband service with more options for its subscribers. The below given table’s show the price difference that both Airtel and Reliance have in their broadband tariff plan. In the broadband service Reliance is second fiddle to its competitor.

Airtel Broadband Tariff

Reliance Broadband Tariff

By implementing apparent strategies that successfully used game theory in their mobile operations, Bharti Airtel added 2.2 million subscribers in December 2007, taking its total base to 55.16 million. Reliance’s total wireless subscribers stood at 46.96-million after adding 1.9 million subscribers during the month.

One more instance where Airtel shocked its competitors especially reliance was after The Indian government outlined the details for auctioning its forthcoming 3G license allocations, the move which could see up to ten 3G operators in the country.

Figure 1

Even though both Airtel and Reliance have won their allocation auctions, Airtel new marketing plan where it offers considerably lower billing fees per month. Their new billing structure is up to 50% cheaper than their competitor’s prices. Understandably, this has created a shockwave in the mobile market as Airtel 3G’s new offer is much better than those currently offered by Airtel 3G’s competitor reliance (the other dominant market force). As per “prisoner’s dilemma” in Fig 1, by lowering prices a significant amount, Airtel 3G has just entered a situation where it has “confessed” (lowered price), in the sense that they chose an optimal strategy to gain a greater “deal” in this given situation. By “confessing” (lowering prices), they are forcing their competitors to somehow react to this shock to the mobile market. According to game theory, Airtel 3G’s competitor (Reliance) should also “confess” by lowering prices for their phone plans in order to compete with Airtel 3G because consumers are most likely to take the more cost-efficient option (which at this point is offered only by 3G). Thus, as Airtel 3G’s competitor (Reliance) loses its market share to Airtel 3G, they will be forced to “confess” because not doing so will result in a greater cost in terms of profitability.

Nash Equilibrium

While prices are key in maintaining the competitive advantage, rolling out new services before the competitors provide enormous edge to an operator. Hence, with the right understanding of time-to-market a service achieves significance in the mobile market.

Figure 2

Game theory technique can be used to analyze interdependent behavior among oligopolistic firms. Game theory illustrates how the choices between two players affect the outcomes of a "game."

Fig 2 illustrates the Nash Equilibrium between Reliance Infocomm and Airtel. . In this type of game the possible outcomes are arranged in the matrix form, which would be useful when the players move simultaneously so that one player shouldn’t observe the behavior of others and more over it’s easy to identify the best outcome. Game theory indicates that the best choice for Airtel is to launch Digital TV broadcasting, regardless of the choice made by Reliance, and Reliance faces exactly the same scenario. Regardless of the decision made by Airtel, its wise for Reliance launch its new Digital TV service. Nash Equilibrium is achieved if both Reliance Infocomm and Airtel launch the new Digital TV broadcast service and the competitive advantage is reduced to zero.

As pricing plays a key role once the equilibrium is obtained, both Reliance and Airtel have introduced their new Digital TV service to the customers in all the major cities of India with different price strategy of their own. The rolling out new service by Airtel can be modeled as an n-person zero-sum game according to game theory, where Nash equilibrium is said to achieve a win-win compromise by Reliance and Airtel.

Conclusion

Game theory has proved itself to be a priceless tool for analysis in various areas including business and economics. In Mobile industry; Operators, regulators and customers play a key role in making this industry dynamic the way it is now and would be in the future. Game theory could help an operator to set the right kind of strategies in pricing, bargaining, auctions or in any matters of establishing competitive advantage over its rivals. The theory also helps regulators in situations like bidding or auctions thus enabling them to greater success and understanding of the real world.

Having its own merits and demerits, the game theory illuminates how rational, self interested people and firms struggle against each other for success and domination in today’s competitive business environment. We can observe that not only in business but also in every other field game theory is used either knowingly or unknowingly.

In game theory either the individuals or firms support their strategies and moves based on what the competitors and the other players in the environment might do. If the other players also think in the same way then it may complicate business as well as the structure of the game.

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