Voluntary relationships among mobile network operators and mobile virtual network operators: An economic explanation

Mobile virtual network operators (MVNOs) do not hold spectrum licenses and own little or no network infrastructure. Rather, they resell mobile services by purchasing airtime at wholesale rates from mobile network operators (MNOs). Unlike ordinary resellers, MVNOs rely on brand appeal and reputation acquired in other businesses to sell mobile services (often bundled with other products). Significant worldwide growth in voluntary MNO-MVNO partnerships, without intervention from public policies that mandate MVNO access to MNO networks, raises many interesting issues. Since MNOs that sell wholesale services to MVNOs potentially forfeit sales in downstream retail markets, voluntary relationships are plausible only if MVNOs add value by widening and/or deepening MNO-served markets. This paper provides sufficient conditions for profit-maximizing MNOs and MVNOs to form voluntary strategic partnerships based on resale, product differentiation, and rebranding. The two key factors are (1) value of the MVNO's brand reputation and (2) wholesale discount at which the MNO offers service to the MVNO.