Capacity Allocation and Pricing Strategies for Wireless Femtocell Services

Abstract: Indoor cell phone users often suffer from poor connectivity. One promising solution, femtocell technology, has been rapidly developed and deployed over the past few years. One of the biggest challenges for femtocell deployment is lack of a clear business model. This paper investigates the economic incentive for the cellular operator (also called macrocell operator) to enable femtocell service by leasing spectrum resource to an independent femtocell operator. On the one hand, femtocell services can increase communication service quality and thus increase the efficiency of the spectrum resource. On the other hand, femtocell services may introduce more competition to the market. We model the interactions between a macrocell operator, a femtocell operator, and 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 incentive to lease spectrum to femtocell operators, as femtocell service can provide access to more users and efficiently increase the coverage. However, when the total spectrum resource is large, femtocell service offers significant competition to macrocell service. Macrocell operator thus has less incentive to enable femtocell service. We also investigate the issue of additional operational cost and limited coverage of femtocell service on equilibrium decisions, consumer surplus and social welfare.