Asymmetric Upgrading of Mobile Services : A Demand-Side Explanation

Despite the accelerated pace at which progress in wireless technologies occurs, it is not uncommon to observe that some Mobile Operators (MOs) do not upgrade their mobile services, while their competitors adopt the newest technological standards. I propose an explanation for this apparent paradox by means of a formal theoretical model that acknowledges demand heterogeneity in a quality upgrading game between horizontally differentiated and competing MOs. Demand heterogeneity stems from the co-existence of both conservative and quality- seeking users in the mobile services market. I derive both symmetric and asymmetric upgrading outcomes depending on (i) the ratio of quality-seeking and conservative users, (ii) the upgrading cost, (iii) the extra-value conservative users attribute to upgraded services, and (iv) the degree of differentiation between competing MOs. Results reveal under which conditions demand heterogeneity leads to higher profits for non-upgrading MOs than for upgrading MOs, constituting the rationale for asymmetric upgrading outcomes to arise