Vertical product differentiation and entry deterrence

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08122.pdf Non-technical SummaryIn the advent of postal market liberalization in several European countries this analysis provides an understanding in which dimensions entering firms will compete with the incumbent and how incumbents may act when they anticipate entry. These insights are valuable as a regulatory framework has to be set up in every country in order to ensure Universal Service, as required by European Regulation.The present model considers entry in a market with vertical differentiation and a geographical dimension where the incumbent firm is required to meet the Universal Service Obligation (USO). That is the obligation to provide a minimum standard, to cover the entire geographic area and to set a uniform, non-discriminatory price. In equilibrium the entrant will offer a higher quality than the incumbent and it will limit its geographical coverage to low-cost areas such as densely populated areas. The limited geographical entry prevents tough price competition, but the incumbent will raise its quality. Thus, the incumbent's customers enjoy higher quality and the entrants' customers receive even higher quality. While consumers benefit the entrant replicates the distribution network. Considering these costs the welfare effect is ambiguous.The experience from already liberalized markets, e.g. Germany, and the model results imply that one can expect a quality increase by the incumbent and an even higher level of service by the entrants. This effect may be realized prior to the effective liberalization date if the incumbent anticipates entry. Since market entry entails only limited specific investments, anticipated entry or potential competition should force the incumbent to raise its quality. Further, the prospect of higher quality may justify the cost borne by the entrants in replicating the distribution network. Zusammenfassung AbstractIn the advent of postal market liberalization in several European countries we expect that the incumbent operators anticipate entry by competitors who are not required to offer universal service, i.e. coverage of the entire country and uniform pricing. The market for postal service exhibits stronger network effects than in telecommunications because of limited interconnection. In the present paper we model entrants which can opt for a partial geographical coverage and who enter with a higher service quality than the incumbent. T...

Section: Literaturementioning

confidence: 99%

“…We know from Lutz (1997) that quality dependent costs would limit the incentive to raise quality but this would not alter the qualitative results. Therefore the exogenous upper bound θ is appropriate in the present context.…”

Section: Quality and Coveragementioning

confidence: 99%

Liberalization of the Postal Service Market in Europe: Entry with Universal Service and Partial Coverage

Beschorner

2008

“…This result is in line with SS and HS. This effect is mitigated as quality dependent costs reduce the incentive to offer the maximum quality (Lutz (1997)). …”

Section: Protected Entrantmentioning

confidence: 99%

“…The model relies on previous research by Gabszewicz and Thisse (1979) and Gabszewicz (1980) on consumer choice under vertical differentiation products, Shaked and Sutton (SS) (1982,1983) providing the foundation of a natural oligopoly in markets with vertically differentiated products, sequential entry (Hung and Schmitt (HS) (1988), and quality dependent costs (Lutz (1997)). …”

Section: Introductionmentioning

confidence: 99%

Ex Post Regulation Facilitates Collusion

Beschorner

2008

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08099.pdf Non-technical SummaryDeregulation and privatization of public utilities in grid-based industries raises the question on how to provide an efficient access to the network infrastructure to entering service providers. Often the incumbent firm which controls the grid is also active on the service market which requires access to the network and where it is competing with entering firms. Balancing the efficiency of service provision and the incentive to invest in the network infrastructure suffers a lack of information and creates a range of discretion to the regulator. Typically, the regulator has to mediate the conflict between the incumbent, which demands a high access fee, and the service entering providers, which complain about excessive access fees.The present analysis indicates for markets in which quality competition is essential that a vertically integrated incumbent benefits from a high access fee. Both the revenue from the access fees and preventing tough price competition are beneficial effects to the incumbent. Entrants will recognize that the access fee is above marginal cost and this gives rise to complaints and requests for reviews of the access rate by the regulatory body.However, if there is a single entrant which is protected from further entry the two active firms may agree upon an access fee that is higher than the marginal cost, which would be the efficient level. The reason is that the higher access fee serves as a commitment device to not engage in tough price competition. Therefore, the incumbent is also willing to raise its price, which results in higher revenue. In this situation a regulator does not face conflicting arguments by the incumbent and the entrant and, under ex post regulation, may not be alerted to review the level of the access fee. ZusammenfassungDie Deregulierung und Privatisierungöffentlicher Versorgungsunternehmen wirft in netzgebundenen Industrien die Frage auf, wie der effiziente Zugang zum Netzwerk durch Wettbewerber auf dem Dienstleistungsmarkt gewährleis-tet werden kann. Oft wird das Netzwerk von einem Unternehmen kontrolliert, das zugleich Dienste unter Nutzung des Netzes erbringt und auf diesem Markt mit neuen Unternehmen in Konkurrenz steht. Der effizienten Bereitstellung der Dienstleistungen durch eine niedrige Zugangsgebühr steht entgegen, dass der Netzwerkbetreiber ein Anreiz haben muss, das Netzwerk zu unterhalten...

“…3 2 Related research on entry/exit has been forwarded, e.g., by Hung/Schmitt (1988), Donnenfeld/Weber (1995, 1992, Lutz (1997), andSiebert (2003).…”

Section: Introductionmentioning

confidence: 99%

Regulatory Standards Can Lead to Predation

Lutz

2005

Self Cite

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