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Pricing practices and firms' market power in international cellular markets, an empirical study (RV of 2002/95/MKT)

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Previous studies on international marketing have typically asked the question: "how is the demand characterized across countries?" Such analysis is then used to provide guidelines for firms to enter new markets and/or to allocate marketing resources across countries. In order to provide such normative guidelines however, one also needs to analyze the supply-side of the problem, i.e. ask: "what is the likely market power that firms will be able to command in different countries?" Given this perspective, the authors use a structural model of oligopolistic competition to measure the market power of cellular service providers across 10 countries from around the world. Next, they relate market power to a number of country characteristics to understand what drives the pricing behavior of firms across markets. They examine and test the effects of four market factors: (i) number of competing firms in the country, (ii) severity of the country's anti-trust policy, (iii) monopolist's lead-time before competition has been introduced and (iv) market growth rates. The results indicate that the average price for cellular services across international markets significantly exceeds competitive levels and may even exceed Cournot-Nash oligopolistic prices. Surprisingly, they find that the number of competitors in the market does not seem to affect firms' market power. In contrast the severity of anti-trust policy in the country plays a significant role in limiting firms' market power. Furthermore, they also find that the longer the monopolist's lead-time in the country the higher is firms' market power in the subsequent oligopoly. These results indicate the existence of collusive pricing among cellular operators in international markets. For managers the findings imply that the attractiveness of richer countries (with usually faster diffusion and larger market potential) may be mitigated by higher levels of competition (as a result of developed anti-trust regulation). From a policy point of view it suggests that (in contrast to the conventional wisdom) simple deregulation may not be enough to reduce prices to competitive levels. In addition, a severe anti-trust policy is crucial to achieve this goal.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2004/2004-16.pdf

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