Entry, Cream Skimming, and Competition: Theory and Simulation for Chile's Local Telephony Market
Eduardo Saavedra and
Xavier Mancero
ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business
Abstract:
After privatizing local exchange companies (LEX), many countries are introducing competition in local telephony in order to encourage both allocative and productive efficiency. However, enormous sunk costs, and scale, scope and network economies cannot guarantee perfect competition. This paper shows that depending upon characteristics of the market - such as market structure or demand - competition may be complete, partial, or even nonexistent. We use a game theoretical three-step model in which an entrant firm cream skims the market. We illustrate our results by using consistent Chilean data, and the model predicts that Chile's local telephony market will not become a deeply competitive market. This result is robust to changes in the model, in particular to price cap regulation. This model provides us with two interesting economic policy conclusions. First, cream skimming makes more profitable the entrance in the market, but this practice reduces the possibility of full competition in the market. Second, Santiago's local telephony market should not be fully liberalized in the near future and prices of the dominant firm should still be regulated.
New Economics Papers: this item is included in nep-com
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)
Downloads: (external link)
http://fen.uahurtado.cl/wp-content/uploads/2010/07/inv132.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ila:ilades:inv132
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business Contact information at EDIRC.
Bibliographic data for series maintained by Mauricio Tejada ().