from the analogue services of Cellnet and Vodafone to their digital (GSM) services has until recently been fairly slow. Table 2.18 shows the pattern of capital expenditure and revenue growth.

During their period of duopoly, the airtime prices charged by cellular operators remained remarkably stable. They quickly converged and remained unchanged in nominal terms between 1989 and 1993. For parts of the period, this price parallelism was assisted by capacity shortages.

The anticipated arrival of the PCN licensees provoked pricing innovation in 1993. Both Cellnet and Vodafone introduced special low user tariffs with relatively low monthly payments and high usage charges. These attracted significant numbers of subscribers.

A feature of the mobile market in the UK since its inception has been the practice of offering customers mobile telephones at substantial discounts. Network operators pay service providers a bonus for bringing a new customer onto the network (to be recovered through airtime sales). Service providers frequently employ this bonus to sell mobile telephones substantially below cost. The success of the strategy clearly depends on maintaining subscribers on the network: the operators are thus susceptible to increases in churn rate.

When Mercury One-2-One launched its PCN service in 1993, it chose to introduce an innovative tariff package aimed at the residential market which offered a relatively low monthly rates and free off peak local calls. It also offered a business tariff which entitled the subscriber to make national calls from a specified location (typically the subscriber's office) at rates lower than BT's. This signalled a desire on the part of the company to compete directly with fixed link operators.

Finally, the tariffs offered by Orange confirm to the familiar pattern of optional non-linear tariffs. Varying amounts of minutes of usage are bundled into the monthly price.

In summary, the mobile market now exhibits a degree of pricing complexity quite different from the uniform single prices which characterised the duopoly period. Mercury One-2-One's marketing strategy has also raised the question of the degree of substitutability between fixed and mobile services. So far there appears to be little evidence of subscribers replacing their fixed link exchange lines with the mobile service. However, this is a possible future development.

Profit series for Cellnet and Vodafone show exactly how the two companies have been able to benefit from their dominant positions in a fast growing market. Table 2.19 shows the rate of return on Vodafone's assets between 1989 and 1991 of between 58% and 76%. It is likely that Cellnet was earning broadly equivalent returns over the same period. The entry of the PCN operators has, however, caused analysts to reduce their profit expectations downwards.

Quality of service has also been a major issue in the mobile market, especially in periods when the two network operators were short of capacity and call failures were frequent. Authoritative comparative estimates of service quality were not available until 1993, when OFTEL commissioned a drive around survey, sponsored by Cellnet and Vodafone. In 1993, however, the survey was discontinued. As a result, there are no comparative data for the six