Design of Capacity-Expandable Product for Competing buyers Yue Jin, Qiong Wang, Ulas Ozen, Mustafa Dogru April, 2008

All Rights Reserved © Alcatel-Lucent 2006, ##### 2 | Presentation Title | Month 2006 Outline Motivation Modeling of the problem Analysis and findings Discussion

All Rights Reserved © Alcatel-Lucent 2006, ##### 3 | Presentation Title | Month 2006 Lucent Compact Lite 800mm (31.5) 450mm (17.7) NT Village 857mm (33.75) 471mm (18.5) NT Village1030/3030 vs. Lucent BTS4400

All Rights Reserved © Alcatel-Lucent 2006, ##### 4 | Presentation Title | Month 2006 Nortel 3030 vs. Lucent 4400 CDMA 850 NAR ID DC Cost Comparison +13% Error Bar

All Rights Reserved © Alcatel-Lucent 2006, ##### 5 | Presentation Title | Month 2006 Design decisions Should we choose software-enabled capacity expansion design or hardware- enabled design? Research focus: What factors would affect our design decisions in addition to the cost factors? Manufacturer Buyer Service Provider End-user

All Rights Reserved © Alcatel-Lucent 2006, ##### 6 | Presentation Title | Month 2006 Modeling of the problem – Manufacturer Software-enabled design qK: Software-enabled design has a strict upper limit on available capacity C(q) = c s q + f(K): fixed cost incurred for initial delivery of products f(K) = f*K: fixed cost is proportional to capacity upper limit q f(K) K cscs C(q) f(K) K cscs

All Rights Reserved © Alcatel-Lucent 2006, ##### 7 | Presentation Title | Month 2006 Modeling of the problem – Manufacturer Hardware-enabled design Hardware-enabled design doesnt have a strict upper limit on available capacity C(q) = c h q: fixed cost is negligible f*K K cscs q C(q) chch Cost equivalence condition: c s +f=c h

All Rights Reserved © Alcatel-Lucent 2006, ##### 8 | Presentation Title | Month 2006 Modeling of the problem – Manufacturer A monopoly manufacturer Two-part tariff to the buyers: an upfront fee T and a per unit incremental price r Cost of a buyer for using capacity q: T + r q Modelling of the problem - Buyers The layout of the network is determined by the service providers in advance of the purchase decision of the base stations. On each node of the network, the service providers place one unit of base stations

All Rights Reserved © Alcatel-Lucent 2006, ##### 9 | Presentation Title | Month 2006 Modeling of the problem - Buyers N identical buyers compete in the end-user market by playing a Cournot game Software-enabled design Hardware-enabled design: no capacity upper limit constraint Price in end-user market Incremental price Capacity used Capacity upper limit

All Rights Reserved © Alcatel-Lucent 2006, ##### 10 | Presentation Title | Month 2006 Modeling of the problem – End user Linear demand curve: p = θ – N q Uncertainty in end users willingness to pay D P p Nq θ θ

All Rights Reserved © Alcatel-Lucent 2006, ##### 11 | Presentation Title | Month 2006 Analysis and findings Buyer maximizes his profit His solution His expected profit (T, r) K p (f K, c s ) Manufacturer Buyer Service Provider End user Nq Θ

All Rights Reserved © Alcatel-Lucent 2006, ##### 12 | Presentation Title | Month 2006 Analysis and findings Manufacturer maximizes his expected profit Upfront fee Manufacturer gets the system expected profit (T, r) K p (f K, c s ) Manufacturer Buyer Service Provider End user Nq Θ

All Rights Reserved © Alcatel-Lucent 2006, ##### 13 | Presentation Title | Month 2006 Analysis and findings Buyer maximizes his profit His solution His expected profit (T, r) p chch Manufacturer Buyer Service Provider End-user Nq Θ

All Rights Reserved © Alcatel-Lucent 2006, ##### 14 | Presentation Title | Month 2006 Analysis and findings Manufacturer maximizes his expected profit Upfront fee Manufacturer gets the system profit (T, r) p chch Manufacturer Buyer Service Provider End-user Nq Θ

All Rights Reserved © Alcatel-Lucent 2006, ##### 15 | Presentation Title | Month 2006 Analysis and findings r s T h.

All Rights Reserved © Alcatel-Lucent 2006, ##### 16 | Presentation Title | Month 2006 Analysis and findings

All Rights Reserved © Alcatel-Lucent 2006, ##### 17 | Presentation Title | Month 2006 Analysis and findings

All Rights Reserved © Alcatel-Lucent 2006, ##### 18 | Presentation Title | Month 2006 Analysis and findings There exist some cases where Π s > Π h even when software-enabled design doesnt have cost advantage, i.e., under the cost equivalence condition: c s + f = c h If θ is small, r s increases the amount of end user served if θ is large, the capacity upper limit helps dampen the competition between the buyers Depending on f, Π s may be greater than Π h even without cost advantage f*K K cscs q C(q) chch

All Rights Reserved © Alcatel-Lucent 2006, ##### 19 | Presentation Title | Month 2006 Analysis and findings Without considering market implication of different designs Decide designs under given prices (T, r) Let θ 0 = (N+1)K+r. Under the cost equivalence condition c s + f = c h, If θ< θ 0, T – fK + (r-c s )q = T + (r-c h )q – f(K-q) < T + (r-c h )q If θ> θ 0, T – fK + (r-c s )K = T + (r-c h )q – (r-c h )(q-K)< T + (r-c h )q Π s > Π h only if software-enabled design has (substantial) cost advantage, i.e. c s + f < c h With considering market implication of different designs Π s may be greater than Π h even without cost advantage

All Rights Reserved © Alcatel-Lucent 2006, ##### 20 | Presentation Title | Month 2006 Analysis and findings K M > N K O : K M (K O ) is the optimal capacity upper limit when there is a monopoly buyer (when there are N identical buyers) Optimal capacity upper limit decreases as f increases

All Rights Reserved © Alcatel-Lucent 2006, ##### 21 | Presentation Title | Month 2006 Discussion f(K) = f*K, upfront cost is proportional to capacity up-limit A monopoly manufacturer N identical buyers compete in the end-user market by playing a Cournot game Linear demand curve: p = θ – N q

All Rights Reserved © Alcatel-Lucent 2006, ##### 22 | Presentation Title | Month 2006 Discussion Q&A