A couple of years ago, the Indian market had several cellular providers offering 3G and 4G services.
Back then, 1GB of data that’d last about a month would cost somewhere between Rs 200 and 300.
Towards the late 2000s and early 2010s, there was a massive pricing war. Companies were trying to undercut each other by offering cheaper rates.
There were several players like Airtel, Idea, Tata, Vodafone, Aircel, BSNL, and a few more.
The executives in each company faced immense challenges in pricing their offerings.
Because in urban and semi-urban areas at least, each company had a good network.
So there was nothing to differentiate one company from the other except the price.
Take Airtel, for example.
If they wanted to appeal to more customers, they’d have to reduce their prices.
But if they reduced their pricing too much, it’d reduce their profits.
On the other side, let’s say in Vodafone’s office, their executive gets a hint that Airtel might be about to reduce their prices.
To undercut them, Vodafone decides to reduce the price just enough to undercut Airtel’s new lower price.
Airtel knows that word spreads fast and that even Vodafone will try to reduce prices.
If Vodafone reduces prices too much, then Airtel gets no advantage by reducing its price.
But keeping the price where it is means everybody starts moving to Vodafone. So they must reduce the price.
Now, if you were working with Airtel, what would you do?
This is a classic example of game theory.
When you are competing for a limited resource (in this case, mobile phone users), your gain is someone else’s loss. And your loss is someone else's gain.
This is called a zero-sum game.
And, the people you are competing against are intelligent and rational.
So what do you do?
In the above example, it would be better for all companies to agree that it is harmful to them to continue fighting each other; to continue reducing the prices.
Ideally, they’d just agree to keep the prices where they were so that all of them could benefit.
But that’s not how humans work.
Each company wants more profits and they’re not concerned about the well-being of the other.
And that’s what sets of the pricing war benefitting us consumers.
Everyone wants the best for themselves and not the others.
At one point, the companies reached a sort of stalemate - a place where they didn’t want to reduce further.
They weren’t cooperating but they weren’t fighting each other either. This is where the prices had stabilised.
This is called a Nash equilibrium.
And then a new player entered the scene - someone who was willing to offer much cheaper rates to gain customers.
Jio was able to enter the space and offer us 30GB per month for Rs 100 to 200. That was such a blow, many of those companies mentioned earlier didn’t survive.
Those who did survive had to reduce prices to Jio’s levels. Airtel did very well because they fought back with similarly lower prices.
Since Jio entered, the total number of cellular companies operating in India went from a total of 12 to only 4.
Game theory is a very real phenomenon. It plays out in every sphere of life - wars, politics, business, our personal relations… everywhere.
To better understand, search the topic ‘Prisoner’s Dilemma’. Once you’re done with that, read about ‘Nash equilibrium’.
But in this case, there’s an assumption. The assumption here is that the person you are fighting is also smart and is being rational.
What makes every zero-sum game far more complicated is that the person you are against isn’t necessarily being rational. Then, it becomes infinitely more difficult to predict what the other side might do.
