Teletraffic engineering/What is tariffing?

Author: Moses Chisala

Summary
This document is about tariffing as applied in the Telecommunications industrial. Several factors have been looked at; tariffing policy entities looking at the customer and what should be priced. Also components of tariffing or tariffs such as; Why are tariffs charged?, Components of tariffs, Special tariffs and Impact of tariffs on traffic.

Definition
The word tariffing comes from the word tariff which means; tax, duty, due, fee, excise, levy or toll paid towards the use of a specific service. In the telecommunication environment it applies to the charging of telecommunication services that have been already used or prior to. Therefore, tariffing can be defined as the process of fixing a duty, fee or a price on the telecommunication services provided by the service provider and utilized by the end user (consumer) and the public policy regulating body acting as an overseer. The regulating body provides standards and guidelines to both the service provider and the end user. The standards and regulations imposed differ from one country to another.

Some of the elements affecting tariffing are:- Monopoly or competition; Pricing and Tariffs; Universal Service; Network interconnections and Abuse of Dominance.

Tariffing policy entities:

Customer

An end user customer uses one telecommunications network to initiate a communication to another customer of the same network or another. An 'interconnector' is a network operator that terminates a communication from a customer of another network operator to a customer of its network.

What Should Be Priced?

a. Rate Elements and Rate Structure

"Price elements and the structure of prices are intended to address two related issues: on the supply side, to ration scarce resources, and on the demand side, to change consumption behavior of end users.

The decision to make the next telephone call depends on the price of that incremental call, not the average price of all calls. The decision to talk for the next minute, once a call is placed, is based on the perceived price of that incremental minute. The decision to subscribe to a service is based on the perceived price of that incremental service. Each of these marginal decisions is performed by comparing the perceived price to the perceived benefit to be obtained. Customers often undertake these decisions with poor information, incomplete understanding, and only a vague notion of the actual price that will be charged. Time-of-day pricing is a crude form of peak load pricing, intended to cause users to change their behavior by shifting some of their calling to off-peak periods. Multi-part tariffs (fixed charge + usage-sensitive charge) can be used to segment the market according to user characteristics." [2]

The figure below shows a simple telecommunication network indicating the routing of the local call and long-distance call.

Simple Telecommunication Network

b. “Product” Definitions

"Fundamentally, the circuit switched telephone network is a time-sharing network. Telephone companies set different prices for different minutes of use, depending on the identity of the user, the distance of the call, and the time of day." [2]

The following componets also should be considered when looking at tariffing;

Why are tariffs charged?

Components of tariffs

Special tariffs

Impact of tariffs on traffic

Price-elasticity of demand

Elasticity of demand for new installations may be estimated taking into account the subjective price perception of potential customers. Price elasticity expresses the sensitivity of customers to the cost of the service. The elasticity parameter is calculated as the ratio of percentage change in demand (quantity sold per period) caused by a percentage change in price.

Example
Example 1

If the average price for the new service that has been introduced in the network is R15 and the elasticity of revenue is 0.7. Asuming 4% drop in quantity demand.

Calculate

I. elasticity of quantity demand

II. the new price

Solutions

I.

$$E_{RP} = 1 + E_{qp}$$

0.7 = 1 + Eqp

Eqp = - 0.3

II.

Eqp = [(Q1/Qo) - 1]/[(P1/Po-1]

- 0.3 = [-0.04]/[15/Po-1]

Po = R13.24

Exercises
Question 1

A mobile network provider charging R2 per 1Mb data download has a subscriber base of 1.2 million for a period of six months. The subscriber base increases in five months to 1.6 million after the 64% reduction per download.

Calculate

I. the initial quantity demand

II. the relative Change in quantity demand

III. the relative change in price

IV. elasticity of quantity demand

V. elasticity of revenues

VI. comment on the answer in v.

Qo = 200,000 (Q1-Qo)/Qo = 0.6 (P1-Po)/Po = -0.64 Eqp = -0.9375  ERP = 0.0625