Duopoly and competition: The case of American cellular telephone

Telecommunications Policy

Volumn 22, Issue 7, 1998, Pages 593-607

  Fullerton, Hugh S ^a  

^a Sam Huston State University   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

COMPETITION; MARKETING; TELECOMMUNICATION SERVICES;

DUOPOLY MARKET STRUCTURE;

CELLULAR TELEPHONE SYSTEMS;

EID: 0032136802     PISSN: 03085961     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0308-5961(98)00037-8     Document Type: Article

References (27)

1. For example, Friedman, J. W., Oligopoly Theory. Cambridge University Press, Cambridge, 1983.
2. Friedman uses duopoly examples frequently in his comprehensive work on oligopoly, but rarely treats it as a distinct case. Others, such as Anderson, S. P. and Engers, M., Stackelberg versus Cournot oligopoly equilibrium. International Journal of Industrial Organization, 1992, 10, 127-135,
3. Geroski, P. A., Phlips, L., and Ulph, A., Oligopoly, competition and welfare: Some recent developments. Journal of Industrial Economics, 1985, 33, 369-386, examine theoretical aspects of oligopoly and duopoly.
4. Among the few data-based studies of duopoly are Ng, Y., Should a 'natural monopolist' be subject to competition? With special reference to cellular mobile telephone services in Australia. Australian Economic Review, 2nd Quarter 1991, 32-44
5. Hazlett, T. W., Duopolistic competition in cable television: Implications for public policy. Yale Journal on Regulation, 1990, 7(1), 65-119.
6. Stoetzer, M.-W., and Tewes, D., Competition in the German cellular market? Lessons of duopoly. Telecommunications Policy, 1996, 20(4), 303-310, examine the German case, which is made somewhat imprecise by the availability of possible substitute technologies.
7. For accounts of the FCC cellular duopoly market decision, see Calhoun, G., Digital Cellular Radio. Artech House, Inc., Norwood, Mass., 1988;
8. Davis, J. A., Cellular mobile telephone services. In Managing Innovation: Cases from the Services Industries, B.R. Guile, and J.B. Quinn, (Eds.), National Academy Press, Washington, 1988, pp. 144-164.
9. Hardman, K. E., A primer on cellular mobile telephone systems. Federal Bar News and Journal, 1982, 29(11), 385-391.
10. Two studies have been made of the competitive characteristics of the cellular telephone industry from different perspectives: Adams, M. W., Entry strategy in local duopoly markets: Symmetry and rivalry in the cellular telephone industry. Doctoral dissertation, University of Tennessee, 1990. Dissertation Abstracts International, 52, 03A,
11. Ruiz, L. K., Pricing strategies and regulatory effects in the U.S. cellular telecommunications duopolies. Paper presented at the 22nd Annual Telecommunications Policy Research Conference, Solomons Island, Md, 1994. Adams used rivalry theory to examine entry behavior, including pricing strategy, in cellular telephone markets. He found that, although cellular firms changed pricing strategies frequently, there was no support for rivalry theory based hypotheses in the determination of competitive behavior in cellular markets. Ruiz, using an extensive data set from a single time period, tested hypotheses on the effects of product differentiation, capacity constraints, regulation, and multimarket interaction on cellular telephone pricing. She did not find statistical support for hypotheses that regulation, product differentiation, or multimarket interaction affected prices. Tests for the effect of capacity constraints produced contradictory results.
12. A History of Cellular Airtime Pricing, January 1985-1991. Information Enterprises, Bland, MO, 1991.
13. A common utility industries model is to set the access fee to cover the fixed costs of the system. If this can be done, the firm could adopt a regime of marginal cost pricing to cover variable costs.
14. See Berg, S. V. and Tschirhart, J., Natural Monopoly Regulation: Principles and Practice. Cambridge University Press, Cambridge, 1988. Considering the case of a natural monopoly, they suggest increasing access fees for demanders who reap greater surplus from a service, thereby making it possible to reduce access fees for consumers further down the demand curve. As long as the individual consumer's utility exceeds the access fee, the consumer will continue to subscribe to the service if there are no other choices. The vendor is practicing price discrimination, although the motive may be cross-subsidization, not excessive profits. The tactic will work as long as the consumer paying the higher access fee can be forced to do so. Resale of the service must be precluded.
15. Price discrimination is an attractive tactic for monopolistic or oligopolistic firms which have a homogeneous product or service, and which face demanders with widely varying elasticities of demand (Kahn, A. E., The Economics of Regulation: Principles and Institutions, Vol. 1: Economic Principles. Wiley, New York, 1970). Essentially, the firm is attempting to charge what the traffic will bear, i.e. more than marginal cost of production but less than the demand curve of the individual customer. If marginal cost is decreasing, price discrimination may improve efficiency, by enabling the firm to charge lower prices at the margin than under a flat pricing scheme. Market segmentation may be regarded as another manifestation of price discrimination. A firm may attempt to segment the market strictly as a sales tactic, or it may be trying to identify and isolate a market niche.
16. Stoetzer and Tewes, The Economics of Regulation: Principles and Institutions, Vol. 1: Economic Principles op. cit., found that price discrimination was a common tactic in the German cellular market.
17. Friedman, The Economics of Regulation: Principles and Institutions, Vol. 1: Economic Principles op cit., examines the leadership models that may characterize duopoly, including the Cournot, Bertrand and Stackelberg models. Under the Cournot model, firms in a duopoly would produce more than a firm under monopoly but less than those under perfect competition. Price can be expected to be less than the monopoly price and more than the pure competition price.
18. Oligopoly profits are higher under Cournot conditions than under Stackelberg (Anderson and Engers, The Economics of Regulation: Principles and Institutions, Vol. 1: Economic Principles op. cit.).
19. Product differentiation or other non-price competition may blunt the impact of price competition, to the point that a firm may successfully ignore its competitors' behavior in setting price or output (Geroski, et al. The Economics of Regulation: Principles and Institutions, Vol. 1: Economic Principles op. cit.).
20. Even if price competition in a duopoly is not anticipated, consumer surplus should be greater than what it would have been under a monopoly, because duopolistic firms will still compete on the basis of service (Ng, The Economics of Regulation: Principles and Institutions, Vol. 1: Economic Principles op. cit.). Friedman notes that the nature of the industry determines which model is the best approximation of the actual situation. Some types of businesses find it relatively easy to adjust prices, but may be limited by high fixed capacity or high costs of adjusting output. Other industries may find it comparatively easy to adjust output, and have relatively less price flexibility. In the case of the Stackelberg model, industry structure and culture may indicate a dominant firm which is likely to behave like the leader. Different firms in an industry may take the role of leader at different times.
21. Author's computation, based on the mean PPI in this study. The US General Accounting Office, using data from the same original source analyzed according to different methodology, estimated that real price decreases (adjusted for inflation) averaged 27% in the same period in the same markets (Anderson, J. H., Telecommunications: Cellular Service Competition. Statement to the Senate Committee on Energy and Public Utilities, California State Legislature, 12 January 1993). The GAO estimate is possibly more accurate, because the mean PPI in this study is not weighted to reflect the distribution of the consumers under actual market conditions.
22. In the conventional telephone industry, the cause of declining prices is seen quite differently by A. Michael Noll (Noll, A. M., A study of long distance rates: Divestiture revisited Telecommunications Policy, 1994, 18(5), 355-362). After reviewing more than 80 years of AT&T long distance rate history, he concludes that deregulation, beginning in the early 1980s, made no difference in the downward trend line. This decades-long downward trend he attributes to a combination of technological innovation and market demand.
23. Carl Danner, a California regulatory staff person, expressed frustration at trying to determine whether a cellular telephone duopoly is competitive or not (Danner, C., The oligopoly paradox: Cellular telephones and a difficult regulatory problem. Journal of Policy Analysis and Management, 1991, 10(4), 671-675). Oligopolists, he asserted, will customarily charge the same price. If they compete, duopolists will set their prices at the same levels. If they collude, duopolists will also set their prices the same, but higher than under competition. From observation of price behavior, regulators cannot tell whether competition or collusion is taking place, because either may result in uniform prices. In the study reported here, the three California markets rated uniformly near the bottom on most of the indicators of competition. Danner's observation illustrates the point that regulators do not have the information possessed by the firms they regulate regarding either production costs or markets. Such asymmetry of information has been much discussed in recent years.
24. See, for example, Laffont, J.-J. and Tirole, J. A., Theory of Incentives in Procurement and Regulation. MIT Press, Cambridge, MA., 1993;
25. Besanko, D. and Sappington, D. E. M., Designing Regulatory Policy with Limited Information. Harwood Academic Publishers, New York, 1987;
26. Crew, M. A. (ed.), Pricing and Regulatory Innovations under Increasing Competition. Kluwer Academic Publishers, Boston, 1996.
27. Deregulation proponents argue that deregulation will lead to market-based competition, influenced by both marginal costs and customer demand, which can be more responsive than poorly informed regulators. Regulation also can distort the behavior of monopoly management and lead to inefficient allocation of resources (Averch, H. and Johnson, L. L., Behavior of the firm under regulatory constraint. American Economic Review, 1962, 52, 1052-1069).