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O.R. Inside Your Telephone Tariff

Telephone companies have a problem in setting their customer tariffs, in that whereas the company's costs are almost entirely fixed (the costs of exchanges and lines or, for a mobile company, transmitter masts, do not vary significantly with the amount of traffic they carry), most customers like to pay for the use they make of the system, rather than face a fixed monthly fee.

Nowadays telephone providers, whether mobile or fixed line, do their best to resolve this situation by offering a range of tariffs to appeal to different users. These tariffs typically consist of a fixed monthly charge, which includes some 'bundled' talk (or surf) time, with extra per-minute charges for call time in excess of the bundled allowance. The per-minute charges typically vary according to whether calls are made at peak time, off peak or at the weekend.

The problem for the phone companies is to work out how many tariffs they should offer and at what levels to set the fixed fee, the bundled time and the various per-minute rates so as to maximise their revenue, in circumstances where maximising revenue requires the company to offer attractive packages which win business from competitors and encourage users to make more use of their phones.

Tricky? Extremely, though not quite so tricky if you put some O.R. inside. At least one leading phone company uses a well-known O.R. approach, dynamic programming, to work out the best set of tariffs for any given description of competitor and consumer behaviour. Of course, in theory that would be fine, except that competitor and consumer behaviour are notoriously difficult to predict. So the analysis is designed to be easy to re-run for different descriptions of those behaviours, and then the company crosses its corporate fingers and hopes that the best tariff won't change much over a fairly wide range of likely behaviours. Fortunately this is the case and so it is relatively easy for the company to fix a set of tariffs which have helped to make the company one of the fastest-growing telecom providers in the UK - thanks to O.R. inside!

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