Research on Multi-Parties Competition and Cooperation in Mobile Payment Market

Headnote

Abstract: Mobile payment has many advantages, such as convenience, attracting more and more people to use. Mobile payment market is vast, containing huge profit and chance. Besides banks, telecom carriers and third-party payment companies are chasing this market, they all want to earn more money in this market. They all compete and cooperate with each other. In the process of game, the government play an important role in it. This paper mainly studies the game between telecom carriers and third-party payment companies, through building the static game model of perfect information, then we analyze the model Nash equilibrium comprehensively. At last, considering the actual situation, we get the main factors of the model which affect Nash equilibrium and choose which operation model the two sides will take.

Keywords: Telecom carrier, Nash equilibrium, Third party payment company, Game.

(ProQuest: ... denotes formulae omitted.)

1.Introduction

Mobile payment is a brand new payment method. In China, the industry chain of mobile payment mainly comprises the following parties: the financial institution (mainly commercial banks), the third party payment company (Alipay, Tenpay et al.,), the telecom carrier, the equipment supplier, the seller and the user, etc. The term "telecom carrier" refers to the provider of network services. The third party company provides a trading platform completely independent of the financial institution and the communication operator. Upon signing agreements with major banks, the third party company provides membership users with backstage support in various payment scenarios so that the user can successfully pay for the commodity he/she has selected. The third party company is able to notify the seller of when the payment will arrive at his/her account, remind the seller to send out the commodity on time, and transfer the payment to the seller's account after the buyer verifies the quality of the commodity. Being an effective guarantee of the security of the seller and the buyer, the third party company is a valuable complement to China's electronic payment system and credit system (Li and Bai, 2011).

The operating mode of mobile payment is rarely the object of foreign researchers. In China, however, scholars mainly conduct the following studies on the topic: Zou Zongsun believes that China's mobile payment market is still in the early stage of development, featuring no definite mode in the absence of applicable laws and regulations. Wang Huihong points out that there are many subjects involved in the value chain of mobile payment in China, and to accelerate the development of mobile payment services, the financial institution, the third party company and the telecom carrier should strengthen cooperation. Jiang Yong (2014) recommends an operating mode for China's value chain of mobile payment through the construction of a game model, and an analysis with game theory. Zhang et al., (2014) also conduct an analysis of the game between the financial institution and the third party company on the industry chain of mobile payment. Establishing a static game model and analyzing the coopetition between the financial institution and the third party company, the two scholars conclude that the best strategy is to let the two parties jointly operate and lead the mobile payment platform. In light of game theory, Yao and Deng (2014) study the game cooperation mechanism between the telecom carrier, the financial institution and the third-party payment company in the industry chain of mobile payment, and draw the conclusion that a reasonable mechanism of resource sharing and income distribution leads to a win-win for all the three parties. In view of the above research, this paper firstly establishes a game model for the telecom carrier and the third party payment company and obtains the Nash equilibrium by solving the model, secondly acquires the constraint conditions of mobile payment between the two parties through analysis of the influencing factors of the two parties, and finally draws the appropriate application model (Barkhordari et al., 2016; Rivest and Shamir, 2010; Salas, 2016; Zhou, 2011).

2.Two Party Game in Mobile Payment Market

2.1.Two Party Game Model

Assumed conditions as follows:

Condition 1: We assume that there are only one telecom carrier and one third party payment company, both of them want to get the dominant power of mobile payment market in the game. Both are limited ration economic men, they are pursing the most profit by adjusting their strategies and choices.

Condition 2: We assume that there are two strategies for both sides to choose: cooperation or noncooperation.

Condition 3: We assume that the game is static game of perfect information, that is to say, both sides know the market uniformly. However, they do not know which strategy the counter-party will take, so the process of choosing strategy is independent.

Based on the assumed conditions above, the profits of telecom carrier and third party payment company are nmc, npc when they cooperate with each other, while the profits of the telecom carrier and the third party payment company are nmn, npn when they do not cooperate with each other. Cm and Cp denote the costs of the telecom carrier and the third party payment company.

It must be pointed out that if customers want to use mobile payment, they should download certain information through the air interface of the communication network which is maintained by the telecom carrier, so if there is no permission of the telecom carrier, the third party mobile payment will not be realized. As a result, the profit of the third party company would be zero without the cooperation with the telecom carrier, that is n "=0. Compared with the third party payment company, the telecom carrier can build and operate mobile payment platform independently, it do not have the dependence on the third party payment company, that is nmn*0.

1. Both of the telecom carrier and the third party payment company choose the cooperation strategy

The third party payment company is responsible for the building and operating of the mobile payment platform, as a result, the cost of the telecom carrier is almost zero, it can be neglected. In this situation, the costs of the telecom carrier and the third party company are nmc and npc"Cp.

2. The third party payment company takes the cooperation strategy, the telecom carrier takes the noncooperation strategy

The third party payment company should invest a large sum of money in purchasing the equipment and updating the system, the cost is Cp, while if the telecom carrier do not cooperate with the third party payment company, the profit np"=0, and the overall profit of the third party payment company is -Cp. If the telecom carrier do not cooperate with the third party payment company, it should also invest a large sum of money in purchasing the equipment and updating the system, as a result, the overall profit of the telecom carrier is nmn-Cm.

3. The third party payment company takes the noncooperation strategy, the telecom carrier takes the cooperation strategy

The third party payment company do not run mobile payment business without the cooperation with the telecom carrier, as a result, in this situation the overall profit of the third party payment company is absolutely zero; Although the telecom carrier wants to cooperate with the third party payment company, the third party payment company does not want to do so, as a result, the telecom carrier cannot run mobile payment business without the support of the third party payment company's payment platform, in this situation, the overall profit of the telecom carrier is absolutely zero too.

4. Both of the third party payment company and the telecom carrier take noncooperation strategy

The third party payment company cannot run mobile payment business because the telecom carrier do not cooperate with it. As a result, the overall profit of the third party payment company is zero; meanwhile, both of them do not want to cooperate with each other, so if the telecom carrier want to run the business independently, it must invest a large sum of money in purchasing and maintaining the equipment and the system, it will cost Cm. As a result, it's overall profit is n -C .

Assuming that the probability of cooperation for the telecom carrier is a, thus the probability of noncooperation is 1-a, the probability of cooperation for the third party payment company is ß, thus the probability of noncooperation is 1-ß. Game matrix is like this:

2.2.Nash Equilibrium of Two Party Game

1. If nm<nmn-Cm, that is to say, the telecom carrier chooses to cooperate with the third party payment company and achieves the maximization of profit. Therefore, the best strategy for it is cooperation strategy, and there exists the only one Nash equilibrium (cooperation, noncooperation). In this situation, the overall profits of the telecom carrier and the third party payment company is n -C and zero.

2. If nmc>nmn-Cm, that is to say, the telecom carrier chooses not to cooperate with the third party payment company and achieves the maximization of profit, in this situation, there does not exist Pure Strategy Nash Equilibrium, but Mixed Strategy Nash Equilibrium instead.

The probability of choosing cooperation strategy for the telecom carrier is assumed to be a certain value a, thus the probability of noncooperation is 1-a, under this circumstance, the expected revenue(profit) of the third party is np:

...

The third party payment company wants to achieve the maximization of profit, so np derivation of ß is zero, it means ax(n -Cp)+(i-aX-Cp)=0, it can lead to a=(Cp/(n?c).

The probability of choosing cooperation strategy for the third party payment company is assumed to be a certain value ß, thus the probability of noncooperation is 1-ß, under this circumstance, the expected revenue(profit) of telecom carrier is nm:

...

The telecom carrier want to achieve the maximization of profit, so nm derivation of a is it means ..., it can lead to ....

We can arrive at some conclusions based on above analysis:

© When the probability of the third party payment company chooses cooperation strategy ß<(nmc)/(nmn-Cm), then a=0, the profit of the telecom carrier is maximum. Under this circumstance, the best strategy which the telecom carrier chooses is noncooperation strategy.

© When the probability of the third party payment company chooses cooperation strategy ß>(nmc)/(nmn-Cm), then a=i, the profit of the telecom carrier is maximum. Under this circumstance, the best strategy which the telecom carrier chooses is cooperation strategy.

© When the probability of the third party payment company chooses cooperation strategy jS=(nmc)/(nmn-Cm), then a=(C )/(npc), the profit of the telecom carrier is maximum. Under this circumstance, the best strategy which the telecom carrier chooses is cooperation strategy with the probability of (C )/(n c), and noncooperation strategy with the probability of i-((Cp)/(n c)). This is understandable, in real world, there are many telecom carriers and many third party payment companies, if there are M telecom carriers and N third party payment companies, thus Mx((C)/(n )) telecom carriers choose to cooperate with third party companies, and Nx((nmc)/(ftmn-Cm)) third party companies choose to cooperate with telecom carriers.

If n =n -C , it means the profits of the telecom carrier are equal whether it chooses to cooperate with the third party payment company or not. Under this circumstance, the third party payment company chooses to cooperate with the telecom carrier because it can get the profit npc"Cp, if it chooses other strategies, it would not get any profit. The telecom carrier and the third party company are not competitors, therefore, the telecom carrier should choose to cooperate with the third party payment company. As a result, (cooperation, cooperation) is the unique solution of Pure Strategy Nash Equilibrium.

2.3.Analysis of the Main Factors Affecting Nash Equilibrium

According to the analysis of the previous section, the input cost Cm is the main factor affecting the decision-making of the telecom carrier due to its direct effect on the profit of the carrier. Cm stands for the total cost covered by the telecom carrier in support of mobile payment services, which consists of hard cost (e.g. transit network construction, POS terminal deployment, etc.), and soft cost (e.g. application for mobile payment license, promotion of mobile payment service, etc.). The analysis of Cm is as follows:

1. If the input cost of the telecom carrier Cm is small, it is very easy to achieve the conditions for nmc<nmn-Cm. According to the above analysis, the game strategy of the two parties should be (non-cooperation, non-cooperation), mainly because of the significant cost advantage of the carrier, as showcased by the low input cost, especially in remote mobile payment. The advantage is demonstrated by the unparalleled connectivity and accessibility of the mobile internet, the complete billing and account management system established by the carrier in the past, and the popularity of cellular phones with Wi-Fi function. Besides, it is easier for the telecom carrier to obtain a mobile payment license on the mobile internet than the third party company and the financial institution. Because of the above-mentioned advantage, the telecom carrier is more willing to carry out the mobile payment business on its own. What is more, as the carrier keeps a firm grip on the customer resources and customer-related data, if it refuses to cooperate with the third-party payment company, then the latter has no choice but to give up the market. Therefore, with the carrier occupying the vantage point in remote mobile payment, the third party payment company has to exit the market, i.e. not get involved in the business of the market. In the mobile remote payment services, communication operators have an active position, third-party payment companies are basically out of the market, which is not involved in the market business.

2. If the input cost of the telecom carrier Cm is big, it is very easy to achieve the conditions for nmc>nmn-Cm. According to the above analysis, the game strategy in this case is mixed strategy Nash equilibrium. The probability that the telecom carrier choose to cooperate stands at (Cp)/(npc), and that of the third party payment company, (nmo)/(nm""Cm). The strategy is illustrated by the coopetition between the carrier and the third party company in the local mobile payment market. In order to promote local mobile payment, both the carrier and the third party company have to invest a high amount to upgrade terminal equipment and transform the system. The terminal equipment is not limited to the cellular phones in the pocket of the user and the POS terminals installed in big shopping malls. Meanwhile, increasingly fierce competition is everywhere, such as declining commission charged on the seller by banks, resulting in smaller and smaller profit of local mobile payment and higher sensitivity of service industry sellers, which rely mostly on local mobile payment, to payment price. Stuck in the dilemma between gaining low profit despite high investment and maintaining quality customers, the telecom carrier may or may not choose to cooperate with the third party company. The third party company will choose cooperation as long as the carrier does not harm its existing interests in mobile payment. In Japan, the telecom carrier develops the local mobile payment business independently, while in the US, the telecom carrier chooses to cooperate with the third party company.

3.Conclusions

This paper establishes two party game model, the static game model between the telecom carrier and the third party payment company, and focuses on the influence of the input cost of mobile operation and the influence of the government coordination on the decisionmaking of the carrier and the third party company. The conclusions are as follows:

1. If the telecom carrier can develop a mobile payment platform at a low cost, both the carrier and the third party company tend to develop their own platforms.

2. If the telecom carrier has to invest a huge amount of money to develop a mobile payment platform, i.e. at a high input cost, the carrier and the third party company will choose partial cooperation to make use of the advantages of the other party and jointly dominate the mobile payment market, and at the same time choose competition, i.e. non-cooperation, on other parts of the business. This is the optimal strategy because it maximizes the profit generated from the mobile payment value chain.

References

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