Economic Viability of Femtocell Service Provision

Femtocells can effectively resolve the poor connectivity issue of indoor cellular users. This paper investigates the economic incentive for the cellular operator to add femtocell service on top of its existing macrocell service. We model the interactions between a cellular operator and users as a Stackelberg game: in Stage I the operator determines spectrum allocations and pricing decisions of femtocell and macrocell services, and in Stage II the users with heterogeneous macrocell channel qualities and spectrum efficiencies choose between the two services and decide their bandwidth usages. We show that the operator will choose to only provide femtocell service if femtocell service has full spatial coverage as macrocell service. In this case, the operator can serve more users at a higher price and thus obtain a higher profit. However, with the additional requirement that users need to achieve payoffs no worse than using the original macrocell service, we show that the operator will always provide macrocell service (with or without the femtocell service). Finally, we study the impact of operational cost on femtocell service provision, where we show that the operator will always provide both services.We also show that as such cost increases, fewer users are served by femtocell service and the operator’s profit decreases.