DP4993 Entry, Cost Reduction and Competition in The Portuguese Mobile Telephone Industry

Author(s): Philippe Gagnepain , Pedro Pereira

Publication Date: April 2005

Keyword(s): mobile telephony , entry , competition , efficiency , empirical analysis

JEL(s): L13 , L43 , L93

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP4993.asp

We study the effect of entry on costs and competition in the Portuguese mobile telephony industry. We construct and estimate a model that includes demand, network, and cost equations. The latter accounts for inefficiency and cost reducing effort. We show that failure to account for cost reducing effort leads to biased estimates of competition in the industry. We also find that our estimated price-cost margins are similar to hypothetical Nash margins, if firms are patient, and have optimistic beliefs about the industry growth. Finally, our results suggest that the entry of a third operator in 1998 led to significant cost reductions, and fostered competition.