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Network Competition and Entry Deterrence

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  • Calzada, Joan
  • Valletti, Tommaso

Abstract

We develop a model of logit demand that extends to a multi-firm industry the traditional duopoly framework of network competition with access charges. Firstly, we show that, when incumbents do not face the threat of entry and compete in prices, they inefficiently establish the reciprocal access charge below cost. This inefficiency disappears if incumbents compete in utilities instead of prices. Secondly, we study how incumbents change their choices under the threat of entry when they determine an industry-wide (non-discriminatory) access charge. We show how incumbents may accommodate all possible entrants, only a group of them, or may completely deter entry. When entry deterrence is the preferred option, incumbents distort upwards the access charges.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5381.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5381

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Keywords: entry deterrence; interconnection; telecommunications;

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  1. Doh-Shin Jeon & Jean-Jacques Laffont & Jean Tirole, 2004. "On the Receiver-Pays Principle," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 85-110, Spring.
  2. Doganoglu, Toker & Tauman, Yair, 2002. "Network Competition and Access Charge Rules," Manchester School, University of Manchester, vol. 70(1), pages 16-35, January.
  3. Ingo Vogelsang, 2003. "Price Regulation of Access to Telecommunications Networks," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 830-862, September.
  4. Gans, Joshua S. & King, Stephen P., 2001. "Using 'bill and keep' interconnect arrangements to soften network competition," Economics Letters, Elsevier, vol. 71(3), pages 413-420, June.
  5. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509.
  6. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 277-311, January.
  7. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
  8. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
  9. Yin, Xiangkang, 2004. "Two-part tariff competition in duopoly," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 799-820, June.
  10. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
  11. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  12. B. Douglas Bernheim, 1984. "Strategic Deterrence of Sequential Entry into an Industry," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 1-11, Spring.
  13. Peitz, Martin & Valletti, Tommaso M. & Wright, Julian, 2004. "Competition in telecommunications: an introduction," Information Economics and Policy, Elsevier, vol. 16(3), pages 315-321, September.
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