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Entry, Cream Skimming, and Competition: Theory and Simulation for Chile's Local Telephony Market

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Eduardo Saavedra () (ILADES-Georgetown University, Universidad Alberto Hurtado.)
Xavier Mancero () (Cepal, Chile.)

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Abstract

After privatizing local exchange companies (LEX), many countries are introducing competition in local telephony in order to encourage both allocative and productive efficiency. However, enormous sunk costs, and scale, scope and network economies cannot guarantee perfect competition. This paper shows that depending upon characteristics of the market - such as market structure or demand - competition may be complete, partial, or even nonexistent. We use a game theoretical three-step model in which an entrant firm cream skims the market. We illustrate our results by using consistent Chilean data, and the model predicts that Chile's local telephony market will not become a deeply competitive market. This result is robust to changes in the model, in particular to price cap regulation. This model provides us with two interesting economic policy conclusions. First, cream skimming makes more profitable the entrance in the market, but this practice reduces the possibility of full competition in the market. Second, Santiago's local telephony market should not be fully liberalized in the near future and prices of the dominant firm should still be regulated.

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Paper provided by Ilades-Georgetown University, School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv132.

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Handle: RePEc:ila:ilades:inv132

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Douglas M. Dunn & William H. Williams & W. Allen Spivey, 1971. "Analysis and Prediction of Telephone Demand in Local Geographical Areas," Bell Journal of Economics, The RAND Corporation, vol. 2(2), pages 561-576, Autumn. [Downloadable!] (restricted)
  2. Park, Rolla Edward & Wetzel, Bruce M & Mitchell, Bridger M, 1983. "Price Elasticities for Local Telephone Calls," Econometrica, Econometric Society, vol. 51(6), pages 1699-730, November. [Downloadable!] (restricted)
  3. Toker Doganoglu & Yair Tauman, 1996. "Network Competition with Reciprocal Proportional Access Charge Rules," Industrial Organization 9611001, EconWPA, revised 14 Nov 1996. [Downloadable!]
  4. Klein, Michael, 1996. "Competition in network industries," Policy Research Working Paper Series 1591, The World Bank. [Downloadable!]
  5. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany. [Downloadable!]
  6. Vickers, John, 1997. "Regulation, Competition, and the Structure of Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 13(1), pages 15-26, Spring.
  7. Manuel Ángel Abdala & José Luis Arrufat & Rinaldo Colome, 1996. "Elasticidades de Demanda de Servicio Telefónico Básico en Argentina," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 33(100), pages 397-424. [Downloadable!]
  8. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 673-699, October. [Downloadable!] (restricted)
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  9. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
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  1. Xavier Mancero & Eduardo Saavedra, 2006. "Un modelo de entrada y competencia en telecomunicaciones," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 21(1), pages 29-57, July. [Downloadable!]
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