Working Paper: CEPR ID: DP4993
Authors: Philippe Gagnepain; Pedro Pereira
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.
Keywords: competition; efficiency; empirical analysis; entry; mobile telephony
JEL Codes: L13; L43; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Entry of Optimus (Y60) | Cost reductions (D61) |
| Entry of Optimus (Y60) | Cost-reducing efforts (D61) |
| Full liberalization in 2000 (F69) | Cost-reducing efforts (D61) |
| Number of competitors (L13) | Incentives to reduce costs (D61) |
| Entry of Optimus (Y60) | Competitive behavior improvement (L13) |
| Competitive behavior improvement (L13) | Lower prices (D49) |
| Lower prices (D49) | Enhanced consumer welfare (D18) |