International Choice Modelling Conference, International Choice Modelling Conference 2017

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STRATEGIC USE OF EXTERNAL BENEFITS FOR ENTRY DETERRENCE: THE CASE OF A MOBILE TELEPHONY MARKET
Maciej Sobolewski, Mikołaj Czajkowski

Last modified: 28 March 2017

Abstract


Recent theoretical models of network competition with call externalities*, demonstrate the strategic incentives of incumbent providers to reduce receiver benefits in rival networks through excessive off-net pricing. Termination-based discriminatory tariffs have a potentially damaging impact on financial standing and slow the market share growth of late entrants – an outcome that has been observed in many European mobile telephony markets. The theoretical reasoning behind the strategic use of call externalities assumes that receiving calls contribute to consumer utility and receiver benefits influence subscription choices. So far, no attempts have been made to test this critical assumption in a rigorous manner. We use subscription choice data elicited from prepaid and postpaid users of mobile telephones in Poland in a discrete choice experiment designed specifically to econometrically model their utility functions. This allows us to disentangle the role played by direct price effects, receiver benefits (incoming price), brand effects, switching costs and network effects. We find that call externalities are a significant driver of subscription choices. Knowledge of consumers’ utility function parameters allows us to simulate two counterfactual scenarios of (1) no excessive off-net price asymmetry and (2) fully symmetrical mobile termination rates and off-net prices. We confirm the theoretical model, estimate the customer base stealing effect encountered by the late entrant and highlight the indirect cost associated with the common practice of establishing asymmetrical mobile termination rates. Our findings confirm that call externalities can be used to deter entry and limit market competition and late entrants’ growth.

 

The manuscript is completely done and will be available soon as a working paper.

 

(*) Jeon, Laffont and Tirole (2004), Hoernig (2007), Armstrong and Wright (2009)

Armstrong, M., and Wright, J., 2009. Mobile Call Termination*. The Economic Journal, 119(538):F270-F307.

Hoernig, S., 2007. On-net and off-net pricing on asymmetric telecommunications networks. Information Economics and Policy, 19(2):171-188.

Jeon, D.-S., Laffont, J.-J., and Tirole, J., 2004. On the" receiver-pays" principle. RAND Journal of Economics 35(1):85-110.



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