Assessing Mergers and Budget Constraint in Multiple-Unit ICT Procurements - The Cooperation/Competition Dilemma

Abstract

Very often Telecom operators and service providers need to procure multiple products and technologies to deliver services to their end users. Regulatory bodies might issue specific requirements for service delivery in specific areas where operators have no incentive to invest. This is typically the case in mobile communication’s industry where operators are forced by the license terms to provide services in low-revenue rural areas. They usually cooperate to build a shared network to reduce the cost of infrastructure while competing in major cities. Similar situation can be encountered in the Fiber to the Home (FTTH) service where the total cost of ownership is extremely high due to the high cost of civil works (e.g. trenching and pulling of fiber).Usually, Telecom authorities encourage operators to share the investment and develop partnerships to overcome the issue of business viability pertaining to high deployment cost. One way of achieving such goal is to deliver products and services under merger to benefit from economy of scale and scope and reduce marginal costs for the required products and services. In the same time, the merging firms are also competing on other standard products and services required by the buyer.

In this document we propose a model for multiple-unit procurement combining Merger and Budget Constraint under Cournot competition. Firms are requested to deliver two products A and B. We assume that the two firms have different marginal costs for product-A, subject to competition while product-B is delivered under merger between the two firms. The empirical part of the article shows that the buyer can comply with the budget constraint by setting a requirement on the minimum quantity of product-B to be delivered by the merger and in the same time optimize the total quantity of products A and B.