Research Summary
Research Summary
"Pricing Practices and Market Power in International Cellular Telephone Markets" (with Dana Nunn)
Description
As the cellular telephone market continues to grow throughout the globe, countries must determine how to best promote market growth and innovation while protecting consumers and ensuring competitive rates. The conventional wisdom has been that introducing competition into new markets will lead to price competition, low prices and increased penetration levels. However, it is not clear to what extent competition limits the market power exercised by cellular operators. This paper uses a structural model of oligopolistic competition to measure the market power of firms in cellular markets across countries. In a next step, it relates market power to a number of market characteristics to explain the pricing behavior of firms across countries. The results indicate that the average price across international markets for cellular services significantly exceeds competitive levels and may even exceed Cournot-Nash oligopolistic prices. Surprisingly, we find that the number of competitors in the market does not seem to affect firms' market power. In contrast the severity of anti-trust policy in the country plays a significant role in limiting firms' market power. Furthermore, we also find that the longer the monopolist's lead-time in the market (country) the higher the firms' market power in the subsequent oligopoly. These results indicate the existence of collusion among cellular operators in international markets. From a policy point of view they suggest that simple deregulation may not be enough to reduce prices to competitive levels. In addition, a severe anti-trust policy is crucial to achieve this goal.