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Collusive conduct in duopolies : multimarket contact and cross-ownership in the mobile telephone industry

Authors Parker, Philip M.
Röller, Lars-Hendrik
Issue Date 1994-05
Summary The deregulation of telecommunications industry has resulted in a variety of industry structures which have been created in hopes of increasing competition. One example is the licensing of cellular telephone services in the United States. In the face of scarce radio spectrum, the FCC has created duopolies in which two firms are granted licenses to compete in strictly defined product and geographic markets. Rate regulation typically imposed for natural monopolies are foregone based on the belief that two firms provide sufficient competition and prevent collusive pricing. We test this assertion using data collected from the cellular telephone industry in the United States. Taking advantage of the unique regulatory environment, we propose a structural model of market power and test to what degree duopolistic competition leads to competitive market outcomes. We find that cellular prices are significantly above competive, as well as non-cooperative duopoly levels. Substantial welfare gains can be achieved through price reductions. We also find considerable variance in pricing behavior across markets and operators. In a second step, we explain the identified conduct in terms of various market and organizational structures that might explain competitive behavior. We find that cross-ownership and multimarket contact are important factors in explaining non-competitive prices. Important policy implications are discussed.
Language English
Format Working paper
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