Network Competition and Entry Deterrence

Posted by D. Daniel Sokol

Joan Calzada, University of Barcelona - Department of Political Economics and Tommaso M. Valletti, University of London - Imperial College discuss Network Competition and Entry Deterrence in their latest paper.

ABSTRACT: We develop a model of logit demand that extends the traditional duopoly framework of network competition to a multi-firm industry. First, we show that incumbents establish the reciprocal access charge inefficiently below cost when they compete in prices but they behave efficiently if they compete in utilities. Secondly, we study how incumbents determine the industry-wide access charge under the threat of entry. We show that incumbents may accommodate all possible entrants, only a group of them, or may completely deter entry. When entry deterrence is the preferred option, incumbents distort the access charge upwards.