competitive nonlinear pricing in duopoly equilibrium: the early u.s. cellular telephone industry...
TRANSCRIPT
![Page 1: Competitive Nonlinear Pricing in Duopoly Equilibrium: The Early U.S. Cellular Telephone Industry Eugenio J. Miravete University of Pennsylvania & CEPR](https://reader035.vdocuments.us/reader035/viewer/2022062619/5518c7a6550346991f8b589a/html5/thumbnails/1.jpg)
Competitive Nonlinear Pricing in Duopoly Equilibrium: The Early U.S.
Cellular Telephone Industry
Eugenio J. Miravete
University of Pennsylvania & CEPR
Lars-Hendrik Röller
WZB, Humboldt University & CEPR
(Chief Competition Economist, European Commission)
This version: February 24, 2005
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Introduction
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Road Map
• Motivation
• Literature Review
• The Data
• Model Description
• Econometric Implementation
• Policy Evaluations
• Things that still need to be done.
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Motivation
• Nonlinear pricing under competition:– Abundant evidence that firms engage in price discrimination
practices even when they operate in competitive environments.
– Business practices have not been matched by theoretical models until very recently.
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Identification Issues
• What are the basic estimation problems of the NEIO?– Marginal cost data is very rarely available.– Price-cost margins have to be estimated together with
demand and cost parameters.– They change with consumption level in nonlinear tariffs.
– Difficulties concerning the identification of the actual competition regime.
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Our Approach
• How do we incorporate the features of second degree price discrimination into the estimation of a structural equilibrium model of nonlinear pricing competition?
– Nonparametric identification: Provided a given specification of demand, there is a one-to-one mapping between the distribution of types and the optimal nonlinear tariff.
– Then we can make use of the information contained in the SHAPESHAPE of the tariffs offered by competing firms.
– We assume Nash equilibrium in nonlinear tariffs.
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Our Approach
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Modeling Choices
• Several approaches are possible to deal with nonlinear pricing competition:
Single-Dimensional
Types
Multidimensional Types
Exclusive Agency Stole (1995)
Rochet and Stole (2002)
Random Participation
Serious Identification Issues
Common Agency
Rey (2000)
Better for models of vertical product differentiation
Martimort-Rochet-Stole
Horizontal Product Diff.
Suits best the available information (spec. test).
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Literature Review
• Second degree price discrimination (reduced form):– Shepard, JPE´91: Full service vs. self-service gasoline.– Borenstein, RAND´91: Leaded vs. unleaded gasoline.– Cohen, 2000: Packaging size of paper towels.
• Non-uniform markup changes (reduced form):– Borenstein, RAND´89: Airline pricing.– Busse and Rysman, 2001: Advertisements in yellow pages.– Busse, JEMS´00: Similarity of cellular phone tariffs.
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Literature Review
• Second degree price discrimination (equilibrium models):– Clerides, IJIO´02: Inter-temporal pricing of books.– Leslie, 2000: Pricing of a Broadway theater.– Cohen, 2001: Packaging size of paper towels.– McManus, 2001: Pricing of specialty coffee (size), U.Va.– Ivaldi and Martimort, Rev. Ec. et Stat´94: Power in France.– Basaluzzo and Miravete, 2004.
• Linear Pricing (conjectural variations approach):– Parker and Röller, RAND´97.
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Goals
• Provide with an operationally feasible method of estimation for competitive markets where price discrimination is common.
• Minimize the data requirements.
• Evaluate how non-uniform markups change with competition. Who benefits the most?– Incumbent vs. entrants.– Large vs. small customers.
• Policy analysis: – Mergers, pricing restrictions, and other counterfactual
evaluations.
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The Data
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Some Facts: World
• Cellular phones are quintessential part of IT revolution of the 1990s.
• Currently, there are 1.3 billion subscribers worldwide.
• The number of wireless phones will surpass the number of fixed-line subscribes in 2002.
• It currently accounts for more than 30% of the $1 trillion total worldwide telecommunications revenues.
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Some Facts
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Some Facts
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Some Facts: U.S.
• United States, 2001:– Market penetration of 45% with 136 million subscribers.– Sales: $60 billion.– Employment: 200,000 direct jobs.
• United States, 1988:– 1.6 million subscribers.– Sales: $2 billion.– Employment: 9,000 direct jobs.– Average monthly bill: $98.02.
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Market Definition
• Technological constraint: Scarce radio spectrum.
• Solution:– Service areas divided in small cells served by its own low-
powered transmitter. It allows this frequency to carry a different call in a non-adjacent cell.
– A mobile telephone switching office maintains a continuous transmission when customers move to a cell that uses a different frequency.
• FCC design of the early US cellular market:– Define 305 non-overlapping markets SMSAs.– Assign 50 MHz in the 800 MHz band for cellular services.– Wireline license: fixed line carriers in that area (Block B).– Non-wireline license: any other US citizen or company (Block A).
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Market Definition: SMSA
• It includes a central city or urbanized area of at least 50,000 people.
• It also includes the county containing the central city and other contiguous counties with strong economic and social ties to the central city.
• US Census (1990):– 76% of the population.– 16% of the land.
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Market Definition: SMSA-1980
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Sources: Tariff Plans
• Cellular Price and Marketing Letter, Information Enterprises:– Pricing plans information reported by firms between August of 1984
and August of 1988.– Price plans are typically two-part tariffs with quantity discounts.– The number of plans varies from 1 to 9.– Plans normally include a peak-load component and airtime allowance.
• Our focus: Retail market and peak period.
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Concavity of Tariffs
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Sources: Market Size
• Cellular Business, various issues, 1984-1988:– Cell sites.– Start-up date.
• Remarks:– Output level is not directly observable.– Each cell site represents between 1,100 to 1,300 subscribers.– In a sample of 22 observations in 8 markets between 1985 and 1987, the
correlation between number of cells and subscribers was about 0.92.– Market shares of competing firms are not known (except for the above
mentioned markets).
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Sources: Factor Prices
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Sources: Demand
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Cellular Phones and Security
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The Model
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Demand
• Duopoly. Horizontally differentiated products:
• Monopoly:
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Distribution of Types
• Burr type XII distribution:
• Market specific markups:
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Cost
• Cost function:
• Marginal cost specification:
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Monopoly Solution
• The monopolist solves the following mechanism:
• Optimal tariff:
• Optimal purchase:
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Monopoly: Stochastic Structure
• First stage quadratic approximation:– Measurement errors: Optional two-part tariffs vs. fully nonlinear tariff.
• Interpretation of first stage coefficients:
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How does the model work?
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How does the model work?
AIRTIME 5000
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How does the model work?
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How does the model work?
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How does the model work?
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Approximation Error
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Approximation Error
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Approximation Error
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Identification of Structural Param.
• Highest consumer type:
• Distribution parameter:
• Marginal cost:
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Participation Constraint
• Marginal consumer type:
• Determinants of participation:
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Duopoly: Quadratic Tariffs
• Basic assumption:
• Redefinition of types:
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Duopoly: Distribution of Types
• Joint Distribution of types (Sarmanov):
• Marginal Distribution of Types (Burr type XII):
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Duopoly: Solution• Duopolist 1 solves the following mechanism:
• Optimal tariff payment and purchase:
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Duopoly: Stochastic Structure
• First stage regressions:– Measurement errors: Optional two-part tariffs vs. fully nonlinear tariff.
• Interpretation of first stage regression estimates:
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Identification of Structural Param.
• Highest consumer type:
• Marginal consumer type:
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Identification of Structural Param.
• Distribution parameters (implements Nash perfection):
• Marginal cost:
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Estimation
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Further Identification Restrictions
• Reduced form parameters:
• Structural parameters of interest:
• Still need to fix:
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Estimation of Demand Parameters
• Makes use of a smaller sample (of the largest markets) for which the number of subscribers of both firms is available for a couple of years.
• It is assumed that consumers do not differ in their substitution pattern conditional on their observed characteristics.
• System estimation from the necessary conditions of consumption:
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Alternative Demand Estimates
11.021
2 bb
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Structural Estimates
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Tariff Change After Competition
• Tariffs are uniformly lower for all levels of airtime usage.
• The reduction in the rate per minute is more important for intensive consumers.
• Markups tend to be higher in the duopoly phase:– Efficiency gains of competition vs. identification issues.
• Most of the gain is due to the increase in variety.
• There is very important unobserved heterogeneity:– Very important differences of pricing across cities.
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Tariff Change After Competition
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Estimates & Market Characteristics
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Total Welfare Effects
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Elasticities
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Passing Gains of Competition
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Welfare & Market Characteristics
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Policy Evaluations
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Performance of Pricing Strategies
• Alternative Pricing Strategies:– Two-Part Tariffs.– Linear Pricing.– Flat Tariff.
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Performance of Pricing Strategies
• Alternative Pricing Strategies:– Two-Part Tariffs: Achieve most of the potential profits of screening.– Linear Pricing: Really bad.– Flat Tariff: Excludes “too many” low valuation customers.
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Things to do…
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Performance of Pricing Strategies
• The paper could still be improved in several ways:– Addressing a model of exclusive agency.– Dealing with a real common agency problem.– Estimation of demand using micro data.– Explaining the number of tariff options offered by firms.– Fitting the lower envelope of the predicted menu of two-part
tariffs:– Taking the actual number of plans as given.– Predicting the number of plans to be offered.