INTERNET ACCESS SERVICE MARKET
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Marcelo C. Pereira - 2011 - Version 0.3a

References:

Pereira, M. C. "The internet sector in Brazil: an analysis of the competition in the access market", Masters thesis, University of Campinas, Brazil, 2012.

Pereira, M. C. "O setor de internet no Brasil: uma anlise da competio no mercado de acesso", Prmio BNDES de Economia, Rio de Janeiro: BNDES, 2014.

Pereira, M. C.; DEQUECH, D. "A History-Friendly Model of the Internet Access Market: The Case of Brazil" in Pyka, A.; Foster, J. (eds.), "The Evolution of Economic and Innovation Systems, Economic Complexity and Evolution", Switzerland: Springer, 2015.


Simulation of a provider and consumer market of recurring services 
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The service is defined as a single offer connecting the user to the internet. There are no offer differentiation other than prices and network quality. Service is contracted for a given period, being paid for every period. While the contract is running, prices are fixed. On renewal, users have to choose a new provider or stay with the previous one, at then current prices. Users make errors while evaluating new providers and have some resistance to change providers (loyalty).

Market is based on heterogeneous users who decide which provider to contract based on price and network quality. Relative importance of both factors varies between users. Access service contracting is still constrained by user budget, so the relative best provider should be also affordable enough to be hired. Users have different budgets and their budgets grow over time. New users enter the market periodically.

Service providers are also heterogeneous. They have their own prices, reviewed every period, according to specific behavior rules. Providers also plan their network capacities for every period, defining the base for its network quality. They have access to finance to cover both their investment needs and for running capital. Interest rates, however, are variable according to borrower's profile.

Providers have different strategies mixes for price setting and network planning. 9 different strategies are available to be used. Providers reassess their strategies from time to time, picking a new one if average indicators are better than current strategy results. Strategy selection is based on imitation of best practices inside provider's social group (incumbent/entrant).

Network quality is a relative measure of network (capital) utilization for each provider. Each "capital unit" is designed by capital equipment supplier to adequately support one "typical" network user. Access providers may freely design their networks to accommodate more or less than one user per capital unit, according to their strategy mix, with correspondingly impact on network quality. The more capital units per user, the better network quality becomes, also at higher capital and maintenance costs.

Technology is generated endogenously by a single network equipment supplier and drives access service productivity. Technology innovation happens by both incremental productivity gains for existing technologies or emergence of new and more productive technoloies. Successive waves of new technology, then, drive downstream market competition. All providers have access to the same technology but incumbents may have access to lower prices. 

Depreciation is calculated from an optimization perspective, due to the quick technological advances, that frequently render equipment obsolete (too expensive to maintain in comparison to new equipment replacement) well before traditional accounting time spans (5-15 years). So, network equipment is replaced (accelerated depreciation) as soon as economical interesting to the sevice provider.

New providers may join the market, according if the current conditions are attractive. Providers on a loss for given periods, or with a too low market share, exit the market.

Model is build to be not tied to a given timescale, but initial parameters are configured to resemble quarterly periods (3 months) in a real market.


Ready to use configurations
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In the model home directory (usually in ~/Lsd/Example/Economic/MPereira/Internet_03a) there are three LSD configuration files pre-configured: 
. baseline.lsd has the basic configuration used to operate the model. 
. cs-ptechinc.lsd is an experiment eliminating the incumbents advantages on price of capital (network equipment) and economies of scale. 
. synclinc.lsd is another experiment synchonizing incumbents investment with new technologies introduction. 

Just load the desired configuration in LSD, choose menu Run>Run (or click on the blue triangle icon), wait for the simulation to finish (press F to accelerate the execution), and analyze the results using menu Data>Analysis of Results (or click on the chart icon).