Working Paper: CEPR ID: DP5381
Authors: Joan Calzada; Tommaso Valletti
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.
Keywords: entry deterrence; interconnection; telecommunications
JEL Codes: L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of entry threat (D43) | Access charges below cost (L97) |
| Access charges below cost (L97) | Inefficiencies (D61) |
| Entry threat (L13) | Access charges above cost (L97) |
| Access charges above cost (L97) | Deter entry (Y60) |
| Competing in utilities (L97) | Access charges at cost (L90) |
| Access charges at cost (L90) | Efficiency (D61) |
| Entry costs (L11) | Incumbents' strategy (D79) |