DP3502 Entry in Telecommunication: Customer Loyalty, Price Sensitivity and Access Prices

Author(s): Kjell Erik Lommerud, Lars Sørgard
Publication Date: August 2002
Keyword(s): access fee, collusion, entry, telecommunication
JEL(s): L13, L51, L96
Programme Areas: Public Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3502

The purpose of this article is to investigate the prospects for entry into an existing network in the telecommunication industry, and how public policy may promote a more competitive outcome. We apply a model that captures the fact that the incumbent has an installed base of loyal consumers, some consumers are price sensitive, and the entrant is charged an access fee for entering the network. We distinguish between classical (de novo) entry and reciprocal entry (incumbent entering the neighbouring market), and analyse how such public policy measures as (i) publication of prices by the authorities and (ii) lower access fees affect the competitive outcome. In the reciprocal entry model we find that lower access fees tend to discourage entry into a neighbouring market, while the publishing of prices has an ambiguous effect on entry.