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Entry, Cost Reduction and Competition in The Portuguese Mobile Telephone Industry

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  • Gagnepain, Philippe
  • Pereira, Pedro

Abstract

We study the effect of entry on costs and competition in the Portuguese mobile telephony industry. We construct and estimate a model that includes demand, network, and cost equations. The latter accounts for inefficiency and cost reducing effort. We show that failure to account for cost reducing effort leads to biased estimates of competition in the industry. We also find that our estimated price-cost margins are similar to hypothetical Nash margins, if firms are patient, and have optimistic beliefs about the industry growth. Finally, our results suggest that the entry of a third operator in 1998 led to significant cost reductions, and fostered competition.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4993.

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Date of creation: Apr 2005
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Handle: RePEc:cpr:ceprdp:4993

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Keywords: competition; efficiency; empirical analysis; entry; mobile telephony;

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References

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  1. Gagnepain, P. & Ivaldi, M., 1999. "Incentive Regulatory Policies: the Case of Public Transit Systems in France," Papers, Toulouse - GREMAQ 99.515, Toulouse - GREMAQ.
  2. Madden, Gary & Coble-Neal, Grant & Dalzell, Brian, 2004. "A dynamic model of mobile telephony subscription incorporating a network effect," Telecommunications Policy, Elsevier, Elsevier, vol. 28(2), pages 133-144, March.
  3. Pereira, Pedro, 2001. "Market power, cost reduction and consumer search," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(9), pages 1457-1473, November.
  4. Cadima, Nuno & Pita Barros, Pedro Luis, 2000. "The Impact of Mobile Phone Diffusion on the Fixed-Link Network," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2598, C.E.P.R. Discussion Papers.
  5. McKenzie, David J & Small, John P, 1997. "Econometric Cost Structure Estimates for Cellular Telephony in the United States," Journal of Regulatory Economics, Springer, Springer, vol. 12(2), pages 147-57, September.
  6. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 60(5), pages 1127-50, September.
  7. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, Econometric Society, vol. 48(2), pages 479-89, March.
  8. Philip M. Parker & Lars-Hendrik Roller, 1997. "Collusive Conduct in Duopolies: Multimarket Contact and Cross-Ownership in the Mobile Telephone Industry," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 304-322, Summer.
  9. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, Econometric Society, vol. 48(6), pages 1575-79, September.
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  11. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, Elsevier, vol. 6(1), pages 21-37, July.
  12. Gruber, Harald & Verboven, Frank, 2001. "The evolution of markets under entry and standards regulation -- the case of global mobile telecommunications," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(7), pages 1189-1212, July.
  13. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
  14. Rodini, Mark & Ward, Michael R. & Woroch, Glenn A., 0. "Going mobile: substitutability between fixed and mobile access," Telecommunications Policy, Elsevier, Elsevier, vol. 27(5-6), pages 457-476, June.
  15. Foreman, R Dean & Beauvais, Edward, 1999. "Scale Economies in Cellular Telephony: Size Matters," Journal of Regulatory Economics, Springer, Springer, vol. 16(3), pages 297-306, November.
  16. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 649-70, May.
  17. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 307-33, March.
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Citations

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Cited by:
  1. Russell Pittman, 2012. "The Proposed Merger of AT&T and T-Mobile: Are There Unexhausted Scale Economies in U.S. Mobile Telephony?," EAG Discussions Papers, Department of Justice, Antitrust Division 201202, Department of Justice, Antitrust Division.
  2. Lukasz Grzybowski & Pedro Pereira, 2006. "Simulation of Merger in Mobile Telephony in Portugal," Working Papers 06-22, NET Institute, revised Oct 2006.
  3. Pereira, Pedro & Ribeiro, Tiago, 2011. "The impact on broadband access to the Internet of the dual ownership of telephone and cable networks," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 29(2), pages 283-293, March.

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