Working Paper: CEPR ID: DP1922
Authors: James J. Anton; James H. Vander Weide; Nikolaos Vettas
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.
Keywords: universal service; entry auctions; pricing; telecommunications
JEL Codes: L1; L5; L96
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| universal service requirements (L96) | strategic link between urban and rural markets (R39) |
| strategic link between urban and rural markets (R39) | softer competitor in the urban market (L19) |
| softer competitor in the urban market (L19) | higher prices in both markets (D49) |
| strategic disadvantage faced by firms (L21) | higher prices and profits in the urban market (R32) |
| presence of outside firms in the rural market auction (R33) | affects bidding behavior and market structure (D44) |
| identity of the winning firm (L29) | influences urban market prices and profits (R32) |
| cross-market price restrictions (L42) | higher profits relative to pure oligopoly competition (D43) |