A Bidding Strategy for Oligopoltel’s Broadband Roll Out

The Facts of the Case

A small open economy has a progressive telecommunications regulator. They want everyone to switch to fiber optic technology for their broadband connection. They decide to offer $500,000 annually in government subsidies to the players who commit to building fiber optics to all homes. They open for bidding according to the following rules:

*Whoever asks for the least subsidy wins the bidding , and the government grants whatever is lower of $500,000 or the full amount of their bid; the other player get nothing

*Players who bid so low that their combined bids are less than $500,000 will receive a subsidy up to the amount of their bid

In the country, there are two telecom operators, Monopoltel and Oligopoltel, with 60% and 40% of the broadband market respectively.. The country has a population of 1,000,000, all of whom have broadband connection and pay $10 year for a subscription. Fiber optic customers will have the same price as broadband customers. The operator that installs fiber optics when the other one doesn’t will take half of the other’s customers. However, if both players install fiber optics, their market shares remain unchanged. The annual cost of operating the national fiber optic network is $3,100,000. If both operators receive subsidies, they split the cost of the network pro rata according to their respective market shares.

The strategic questions:

1.) Based on the bidding rules, what is the optimal bid price for Oligopltel?

2.) Should Oligopoltel bid? If yes, how much profit does Oligopoltel expect to gain?

3.) Who emerges as the winner in this case?