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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

Recent changes in telecommunications markets raise the issue of how price restrictions across markets impact strategic entry and pricing decisions. The Telecommunications Act of 1996 opens all 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 simple multi-market model which features an oligopolistic urban market, entry auctions for rural service, and a price restriction across markets, and analyze strategic pricing and entry choices. We show how these price restrictions induce a firm operating in both markets to become a "softer" competitor, thus placing the firm at a strategic disadvantage relative to urban markets competitors. However, 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 Duke University, Department of Economics in its series Working Papers with number 99-04.

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Date of creation: 1999
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Handle: RePEc:duk:dukeec:99-04

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Web page: http://econ.duke.edu/

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Cited by:
  1. Philippe Choné & Laurent Flochel & Anne Perrot, 1999. "Allocating and Funding Universal Service Obligations in a Competitive Network Market," Working Papers 99-55, Centre de Recherche en Economie et Statistique.
  2. Mirabel, Francois & Poudou, Jean-Christophe, 2004. "Mechanisms of funding for Universal Service Obligations: the electricity case," Energy Economics, Elsevier, vol. 26(5), pages 801-823, September.
  3. 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.
  4. Bourreau, Marc & Cambini, Carlo & Hoernig, Steffen, 2012. "Geographic Access Rules and Investments," CEPR Discussion Papers 9013, C.E.P.R. Discussion Papers.
  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, 2000. "Universal service obligations and competition," Information Economics and Policy, Elsevier, vol. 12(3), pages 249-259, September.

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