Market Analysis of Mobile Handsets Subsidies

Subsidies are a widespread practice to allow consumers to get their mobile handsets at deep discount, or even for free. Recently, with 3G and subsequent requirements on sophisticated and costly handsets, subsidies are being reconsidered both in subsidized and non-subsidized markets. In this paper, we analyse the requirements for subsidies with respect to economic efficiency. Using a simplified analytical model with linear demand and supply we illustrate the relationship of subsidies with market factors such as penetration rate, churn rate, country type (developed/developing), and charging type (prepaid/postpaid). Korea, Japan, Finland, and the UK are chosen as case markets since they represent different strategies for handsets subsidies. Our main conclusion is that consumer subsidies, either governmentor operator-funded, can be economically efficient from the national viewpoint when applied for faster adoption of a specific technology at the right time window in a temporary manner.