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Strategic Pricing and Entry under Universal Service and Cross-Market Price Constraints

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  • Anton, James J
  • Vander Weide, James H
  • Vettas, Nikolaos

Abstract

In this paper, we examine how cross-market price restrictions impact strategic entry and pricing decisions. A motivating example is the 1996 Act in the United States which opens telecommunications markets to competition and contains a provision for universal service, requiring that advanced services be made available to rural customers at rates comparable to those for urban customers. We develop a multi-market model which features an oligopolistic urban market, entry auctions for rural service, and a price restriction across markets. Price restrictions induce a firm operating in both markets to become a ‘softer’ competitor, thus placing the firm at a strategic disadvantage. Once we account for entry incentives and recognize that firms may bid strategically for rural markets, we find that the downstream strategic disadvantage becomes advantageous, leading to higher prices and profits in both markets. We also identify when these price restrictions put outside firms, even relatively inefficient ones, at a strategic advantage in entry auctions.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1922.

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Date of creation: Jul 1998
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Handle: RePEc:cpr:ceprdp:1922

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Keywords: entry auctions; pricing; Telecommunications; universal service;

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Cited by:
  1. Mirabel, F. & Poudou, J.-C., 2003. "Mechanisms of Funding for Universal Service Obligations: the Electricity Case," Cahiers du CREDEN (CREDEN Working Papers) 03.11.41, CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1.
  2. Bourreau, Marc & Cambini, Carlo & Hoernig, Steffen, 2012. "Geographic Access Rules and Investments," CEPR Discussion Papers 9013, C.E.P.R. Discussion Papers.
  3. Philippe Chone & Laurent Flochel & Anne Perrot, 2000. "Allocating and Funding Universal Service Obligations in a Competitive Network Market," Econometric Society World Congress 2000 Contributed Papers 0213, Econometric Society.
  4. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2000. "Universal service obligations and competition," Information Economics and Policy, Elsevier, vol. 12(3), pages 249-259, September.
  5. Balmer, Roberto, 2013. "Geographic Regulation and Cooperative Investment in Next Generation Broadband Networks - A Review of Recent Literature and Practical Cases," MPRA Paper 54080, University Library of Munich, Germany.
  6. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2002. "Allocating and funding universal service obligations in a competitive market," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1247-1276, November.

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