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JMM – Vol. 3 – No. 1 – 2001 33
www.mediajournal.org
1 Introduction
The liberalisation of the telecommuni-
cation market in many countries has
marked a fundamental change in busi-
ness practices of telecommunication
providers. We have witnessed a steady
decline in telecommunication prices in
countries with liberalised markets. The
change is also marked by experiments
with new tariff models.
Before deregulation, tariff models, i.e.
calculation schemas and pricing for
telecommunication services were infl u-
enced by national monopoly supply,
social objectives, certain competitive
and customers pressure, and they were
rather less infl uenced by hardware and
software progress and innovation or
international consensus regarding cost
allocation methodologies (Gupta et al,
1997). As a result, there was one tariff
model for specific services (for exam-
ple Ramsey pricing, i.e. differentiation
pricing for telephone services based
on time of usage and distance), which
made telecommunication costs trans-
parent and predictable.
The liberalisation of the telecommu-
nication market in many countries,
the convergence of infrastructure, the
emergence of new services such as
interactive TV and particularly the
explosion of Internet usage has given
rise to a broad discussion of possible
new tariff models in a liberalised
market. The pressure to introduce
new tariffs for telecommunication serv-
ices has also resulted from ineffi cient
resource allocation on Internet based
on the prevailing fl at-rate tariff model
(Walker et al, 1997), (Gupta et al, 1997).
This trend is further encouraged by the
growing possibility of sophisticated
networks based on ATM technology to
support variation of bandwidth and
the measurement of the usage of net-
work resources (Anania et al, 1995).
Finally, in the new competitive environ-
ment, service providers are constantly
under pressure to fi nd new ways of
positively differentiating themselves
from their competitors. One competi-
tive advantage could be the introduc-
tion of new tariff models.
As a result of the developments
described above, the introduction of
new tariff models might be consid-
ered as one possible future scenario
for the development of the telecommu-
nication market (Williams, 1997). This
could affect all players in the market
for telecommunication services – the
consumers, service providers, network
operators and producers of equipment,
i.e. of hardware and software for net-
work operation and management.
The aim of this paper is to provide an
overview of existing tariff models, to
describe experiments made during lib-
eralisation, as well as to describe pos-
sible future scenarios for pricing strate-
gies based on related research.
The content is structured as follows:
First in section 2, tariffs are defined
and the most important tariff models
are explained. Section 3 provides an
overview of existing and possible
pricing strategies for the most impor-
tant telecommunication services: voice
communication over fixed networks,
mobile communication and Internet
communication. Section 4 provides a
summary and an overview of possible
future scenarios for pricing of telecom-
munication services.
2 Defi nition and Classifi cation
of Tariff Models for Tele-
communication Services
In every day life we understand under
the word tariff to be the price for tel-
ecommunication services. This word
is furthermore used interchangeably
with the words rate and price. In this
paper we distinguish between tariff
model and price. Thus, in order to pre-
vent misunderstanding fi rst the basic
terms will be defi ned.
We defi ne a tariff as a scheme of rates
and regulations governing the charg-
ing of telecommunication services. A
specific tariff model consists of two
components:
■ a monetary component called price
and
■ a related tariff model, i.e. a calcula-
tion schema, which clearly delimits
the unit for which the given price is
valid and provides a charging func-
tion which governs the calculation
of costs. For example prices for
voice communication are defined
per time unit of active usage of the
network, whereby the time units
are priced differently according to
distance, time of the day and type
of customer.
In theory numerous tariff models
have been proposed for telecommuni-
cation services. Following, the most
important categories of tariff models
will be described in more detail in
accordance with (Mitchell and Vogel-
sang, 1991).
Tariff Models for Telecommunication Services
in a Liberalised Market
by Katarina Stanoevska-Slabeva, mcm institute, University St. Gallen, Switzerland
www.mediajournal.org
34 JMM – Vol. 3 – No. 1 – 2001
2.1 Typology of Tariff Models
Tariff models are basically classifi ed in
three groups: linear tariff-models, non-
linear tariff models and discounts.
Linear Tariffs are based on an equal price
per defi ned unit of usage and comprise
usage based pricing and Ramsey pric-
ing. In usage based pricing the revenue
depends on the quantity, i.e. number of
units sold. Total cost of a call or trans-
mission is calculated by a multiplica-
tion of the unit price with the number
of units used. Usage based tariff models
differ with respect to what is defined
as the basic unit of usage. For telecom-
munication services, the unit of usage
might be: time of usage, volume trans-
ferred, and allocated bandwidth.
Ramsey pricing or differentiation pric-
ing is a special linear tariff, where dif-
ferent prices are charged for essentially
the same service, i.e. for a defi ned unit of
usage. The prices can be differentiated
according to customer type (for example
private and business customer), time of
the day, distance of the call, etc. For fur-
ther examples of differential pricing and
its economic aspects see (Varian, 1996).
Non-Linear tariffs result in different
prices per used unit. The best known
and simplest non-linear tariff is flat
rate (McKnight et al, 1997). With this
model, the customer pays a fi xed price
for a certain period of time, regardless
of how much he uses the service. From
the customer’s point of view, the abil-
ity to budget for that service may be an
advantage. The service provider also
saves costs, as no measurement related
to charging is required.
Further tariff models can be defi ned by
combining linear and non-linear tariff
models to complex tariff-models. One
such example is the Two-Part Tariff
which consists of a fi xed entrance fee
for a certain period of time and Ramsey
Pricing for used units.
The above mentioned tariff models
can, furthermore, be combined with a
fixed or changeable price per defined
unit. In the fi rst case we have static
tariff models and in the second case
we have dynamic tariff models (Morris
and Verus, 1999). Static tariff models
are all linear tariff models. Examples
of dynamic tariff models are the
block dynamic tariff and the discrete
dynamic tariff, where the price per
unit is increased or decreased during
the transmission once a set amount of
used units is reached.
Discounts are a special type of tariff
model. While the above described tariff
models are applied in order to calcu-
late the cost of each call or transmis-
sion, discounts are applied to decrease
the total cost for the customer. They
are defi ned as a percentage of total
costs, which is deducted at the end of
the billing period. They can be defi ned
over total costs incurred for a special
type of transaction or on total costs
incurred for a certain period of time.
Discounts are applied in combination
with tariff models and result in an
additional reduction of prices.
2.2 Charging and Billing
of Telecommunication Services
Tariffs are used in order to calculate the
total cost for a telecommunication serv-
ice used by the customer. Thus, they pro-
vide the base for charging and billing of
telecommunication services. Charging
is the process of determining the total
cost for telecommunication services for
a certain period of time. Billing is the
process of notifying the customer about
the charges and the legal require for
payment.
Charging can take place in two ways 1)
on a regular basis for an agreed upon
period of time (for example monthly
or quarterly) or 2) during the call.
In the second case, we are talking
about advice of charge (AOC). Advice of
charge is a special network function,
which allows notification of charges
before, during and immediately after a
call. AOC is the prerequisite for online
and real-time charging. It is already
applied in case of calls from public
phone cabins or prepaid cards.
3 Prevailing Tariff-Models
for Telecommunication
Services
In this chapter the prevailing tariff
models for the most important tele-
communication services as voice com-
munication, mobile communication
and Internet will be described.
3.1 Prevailing Tariff Models
and Pricing Strategies
for Voice Communication
over Fixed Phone Networks
Before liberalisation, voice communica-
tion was charged based on a two part
tariff model consisting of:
■A fi xed monthly access fee and
■Ramsey pricing for defi ned time
units of network usage. Prices were
differentiated according to type of
customer, distance of the call, time
of the day and day in the year (holi-
days and working days).
Against this background new providers
of telecommunication services applied
the following pricing strategies (Sta-
noevska-Slabeva, 2000): the Ramsey
pricing part of the former monopo-
list’s two-part tariff model. The new
entrants also tried to differentiate
themselves and to attract customers by
remarkably lowering prices when com-
pared to the prices of the incumbent.
Most entrants used the percentage
of reduction against the price of
the incumbent as a major marketing
slogan.
Even though new entrants adopted
Ramsey pricing, they tried to differen-
tiate by changing some of the param-
JMM – Vol. 3 – No. 1 – 2001 35
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eters of these calculation schema. In
particular each entrant tried to defi ne:
■ different time units, for which prices
were defi ned,
■ different time intervals as peak and
off-peak intervals with different
prices. (see for example the strate-
gies of two Swiss companies Sunrise
and Swisscom provided in fi gure 1).
As a further differentiation strategy
of new providers, numerous discount
models have to be mentioned. Exam-
ples of discount models include:
■ discounts on costs for calls to one
or several predefi ned domestic and
international telephone numbers or
countries,
■ discounts on costs for calls to cer-
tain telephone numbers with the
highest monthly turnover,
■volume discounts on total costs
occurred during a given period of
time (for example monthly).
The discount rates and the strategies
for which kind of calls discounts are
offered differ from provider to pro-
vider. Private and business customers
are treated differently as well.
Besides the above described European
developments, the following pricing
strategies and experiments have to be
mentioned:
■Application of fl at-rate for local calls
in the USA. This pricing strategy led
to higher communication traffi c in
the USA, when compared to Europe,
and also fostered Internet adoption
and usage.
■Free phone communication, which
is financed with advertising. With
this model, the customer does not
pay for the services, but has to listen
to advertisements during his call.
This experiment was conducted in
the German market. Even though
there were a sufficient number of
interested customers for the free
service, it was not rolled out after
the test phase because there were
not enough interested parties, who
wanted to advertise over the phone.
The above described developments
resulted in significantly lower prices
for telecommunication services, but
also increased the opaqueness of the
market. The providers with their numer-
ous tariff times and time units cause
confusion for the consumer.
3.2 Prevailing Tariff Models
and Pricing Strategies
for Mobile Communication
With respect to applied tariff models,
the same observations can be made in
mobile communication as with voice
communication. Before liberalisation,
mobile communication was priced
with a two part tariff, consisting of a
fixed monthly access fee and Ramsey
pricing per time unit of usage. The
same tariff model is also used after lib-
eralisation, but again with a redefini-
tion of basic parameters.
Another important change is the grow-
ing importance of advice of charge and
prepaid cards for mobile communica-
tions. Prepaid cards apply Ramsey pric-
ing, i.e. a linear tariff for usage and
advice of charge as the cost of each
call is deducted from the amount on
the card. Even though price per unit is
higher as it includes a portion of the
fixed fee, prepaid cards are popular
as they enable an easy control of total
costs for communication and do not
require a check of the creditworthi-
ness of the customer. Prepaid cards are
especially interesting for young people
with limited budgets for communica-
tion.
New tariff models will be necessary
with the introduction of third genera-
tion (3G) digital packet-switched broad-
band mobile networks, such as Gener-
alised Packet Radio Service (GPRS) and
Universal Mobile Telecommunications
System (UMTS). GPRS is seen as the fi rst
step towards UMTS and is currently
being established in several European
countries. These technologies enable
an always on connection to the Inter-
net and hence one that will permit
charges to be levied per packet sent,
i.e. based on the volume of received or
send data (Curwen, 2000). Given the
different volume-based tariff models
prevailing currently on the market
for business customers of Internet
described in more detail in the next sec-
tion, scenarios for volume-based pric-
ing of mobile services are expected.
With the introduction of 3G mobile
networks, new pricing paradigms will
be applied for mobile communication,
which might pose a serious obstacle for
0
a.m. 8
a.m. 5
p.m. 10
p.m. 12
p.m.
6
a.m.
Night Low Normal Low Night
Night Normal Low Night
0
a.m. 8
a.m. 5
p.m. 11
p.m. 12
p.m.
SWISSCOM
SUNRISE
Figure 1: Comparison of tariff times on the example of Sunrise and Swisscom (Stanoevska-Slabeva, 2000)
www.mediajournal.org
36 JMM – Vol. 3 – No. 1 – 2001
the adoption of the technology. Exist-
ing experiences in pricing of telecom-
munication services show that the cus-
tomer is used to and prefers simple
tariff models such as fl at rate (Odlyzko,
2000) and that volume based tariff
models can considerably infl uence
usage (see also the volume-based tariffs
for the Internet services in the next
section).
3.3 Prevailing Tariff Models
and Pricing Strategies
for the Internet
Prevailing tariff models and pricing
strategies for Internet differ for the
end-consumer and business market.
Before liberalisation, Internet access
via telephone for private customers
was charged according to a two part
tariff model: a fixed monthly charge
for a certain amount of hours of usage
and a linear tariff for any additional
hour exceeding the hours included in
the fi xed access fee. In addition, the tel-
ephone connection during the Internet
sessions is charged at the lowest local
tariff offered.
Due to the strong competition, pro-
viders were constantly increasing the
number of hours included in the fi xed
monthly charge, which was a clear
trend towards a flat rate. At present,
there are many providers in Europe
offering a fl at-rate or free Internet,
which is similar to the situation in the
USA.
Compared to the end-customer market
for Internet access, the market for busi-
ness customers is basically priced by
volume-based tariffs, in particular in
countries, which have expensive lines
to the USA. One example, which is doc-
umented in literature, are the univer-
sity networks in Australia and New
Zealand (Brownlee, 1995), (Carter and
Guthrie, 1995). Other examples are the
SWITCH network in Switzerland (for
a detailed description see Stiller et al.,
2000) and the JANET in Britain. The
experiences with usage based pricing
show, that these tariff model affects
usage intensity (Odlyzko, 2000), (Stiller
et al., 2000).
Another variant of volume-based charg-
ing, that seems to have become popu-
lar recently is a ‘Bursty” rate, where the
Internet Service Provider periodically,
e.g. every hour, measures the volume
of data transferred over the connec-
tion. For each charging interval, e.g.
a month, all samples are sorted by
volume. A fi xed percentage of the high-
est samples are discarded to eliminate
unusual peaks, and the highest remain-
ing sample is used to defi ne the band-
width at which the connection is
charged (Stiller et. al, 2000).
Due to congestion on the Internet in
the late 1990s and equal quality of serv-
ice for all users there has been great
controversy in science concerning the
right pricing model for Internet. A sum-
mary of tariff models proposed by dif-
ferent researchers is given below:
1. Quality of Service (QoS) based
pricing.
One interesting example of QoS-based
charging is the Paris Metro Pricing
model proposed by (Odlyzko, 1999),
(see also Fishburn and Odlyzko, 1998).
Under this approach the network is
divided into different logical subnet-
works, each of them handling packets
on the best-effort base, but charging
different prices for them. This is an
analogy to the price system used in the
subway of Paris, and it is to be expected
that a more expensive subnet will be
frequented less often and is hence
able to deliver high-quality service, but
without giving formal guarantees for
that. Descriptions of other QoS based
models can be found in (Stiller et al.
2000).
2. Auction based allocation
of Internet resources.
The idea of auction pricing was intro-
duced by MacKie-Mason and Varian
(1995) and is known under the name
smart market approach. With auctions,
the prices for services are determined
based on consumer bids. The basic idea
is, that each packet contains a bid, and
if it is served, pays a clearing price
given by the highest bid among pack-
ets which are denied service. Thus,
each node in the network becomes an
efficient market. Another approach
is the ‘Progressive Second Price Auc-
tion for Network Bandwidth Sharing’
proposed by Lazar and Semet (1999).
Compared to the previous approach,
this approach proposes auctioning of
bandwidth, rather than auctioning
based on individual packets. Available
bandwidth is split into small units, and
users bid for the required bandwidth
at each auction period. This approach
generalises the idea of Vickrey auctions
– the winner pays the price per unit
which is calculated from all players’
bids, when each of them is weighted by
how much the allocation of that player
is decreased by the existence of their
bid.
All auction based approaches for
resource allocation and price determi-
nation show an often cited drawback
of a lack of price transparency and pre-
dictability. This results in problems
for communication budget defi nition.
In addition, auction-based pricing
requires adoption of the technology
and hardware. Due to the these draw-
backs, it is not sure if auctions will be
accepted by users. Relevant input with
respect to this question is provided by
the INDEX project at Berkeley, which
conducts experiments with static,
usage-based pricing schemes (Varian,
1999).
JMM – Vol. 3 – No. 1 – 2001 37
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3. Content-based pricing
The concept of content-based pricing
was introduced by (McKie-Mason, Schen-
ker and Varian, 1996). The authors dis-
tinguish content and application blind
networks and content and application
aware networks. The second type of
networks has the possibility for differ-
entiation pricing based on the type
of content transported through the
network.
Another approach, which proposes
pricing for differentiated Internet serv-
ices is the one proposed by Hartanto
and Carle (1999). They propose an appli-
cation architecture, which allows appli-
cation of various tariff models (time
unit or volume based) for different serv-
ices (see also Semet et. al, 1999).
4 Summary and Outlook
Based on the fi ndings described in the
sections above the following conclu-
sions can be drawn:
■The prevailing tariff model for voice
communication is the two part
tariff model consisting of a fi xed
entrance fee and Ramsey pricing for
a defi ned time unit of usage. Dif-
ferentiation is usually performed
according to the type of customer,
time of the day, distance and day of
the year. The Liberalisation of tele-
communications markets has there-
fore not yet led to an application of
new tariff models on a large scale.
■The basic differentiation strategy of
new entrants was aggressive price
policies. Another differentiation
strategy of entrants was the redefi ni-
tion of the parameters in Ramsey
pricing and the introduction of
numerous discount models, which
resulted in great opaqueness of the
market.
■For Internet services the prevailing
tariff models are free access, fl at
rate or a two part tariff model with
fixed access fee and linear pricing
per defi ned time unit spent online
for the end-consumer and volume-
based pricing for business custom-
ers.
■The growing importance of advice
of charge and various prepaid cards,
which are based on advice of charge
is obvious
■New kind of tariff models such as
bandwidth allocation by way of auc-
tions, bandwidth oriented pricing,
QoS based pricing, usage based pric-
ing for transmitted volume instead
of time used or content-based pric-
ing have had an experimental char-
acter.
The neglectance of possible tariff
models other than Ramsey pricing
based on time used, can be explained
with the following reasons:
■Due to the earlier monopoly, the
profi t margins included in the
prices of the incumbents were high
enough to provide a great opportu-
nity for a price war. An aggressive
price policy is also a great marketing
instrument and effi cient for attack-
ing of new customers and for win-
ning market share.
■Discounts are also very effi cient
marketing instruments and enable
individualised pricing without the
necessity of introducing new equip-
ment. This fostered their broad
usage.
■Telecommunication services on offer
have remained basically the same.
New services such as interactive TV,
video on demand or broad usage of
video conferencing, which might
require high Quality of Service and
bandwidth are still not in wide
use. As a consequence there is no
demand for tariff models based on
QoS or bandwidth allocation.
■The introduction of free access and
fl at rate for popular services such as
the Internet is expected to increase
demand for voice communication.
Can this trend of price decrease con-
tinue? What could be the future pric-
ing strategies? The following future
scenarios can be envisioned and are
explained shortly below:
■The opaqueness in the market
requires real time feedback for the
customer, i.e. advice of charge. AOC
is currently available during the call
and after the call, but AOC before
the call can increase the transpar-
ency of the market and is attracting
high attention.
■Another possible development is
the combination of different tariff
models for the same service. For
example in many countries early
attempts can be observed where
during the week a two part tariff is
used for voice communication and
a fl at rate during the weekend. Such
pricing strategies have remarkable
marketing effects.
■Application of different tariff models
with respect to the offered service.
For example a common pricing
policy can be defi ned for several
services (for instance free Internet
bounded to subscription to the pro-
vider).
■Volume based tariff models for
mobile communication, will become
relevant latest with the introduc-
tion of GPRS networks.
■Tariff models based on QoS in par-
ticular for applications demanding
high QoS.
■Application of different tariff models
depending on the content transmit-
ted and the used service.
www.mediajournal.org
38 JMM – Vol. 3 – No. 1 – 2001
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About the Author
Dr. Katarina Stanoevska-Slabeva
(katarina.
stanoevska@unisg.ch) is currently working as
a lecturer and as a scientifi c project manager
of the research area “Media Platforms and
Management” at the Institute for Media
and Communications Management at the
University St. Gallen. Her research interests
are media platforms and telecommunica-
tion services, concepts for management of
media platforms and reference models for
component-based media.
