DP3237 | Market Entry and Roll-out With Product Differentiation

Publication Date

20/02/2002

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Abstract

This Paper examines a general problem exemplified by post-auction (third generation ?3G?) mobile telecommunications markets and by recent developments in the UK market for postal services. When entering these (or any other) markets, firms must often decide on the degree of coverage (?roll-out?) they wish to achieve. Prior investment must be sunk in order to achieve the desired (or mandated) coverage level. We study the private and social incentives of a would-be entrant into a market with horizontal product differentiation when choosing its level of roll-out. The endogenous extent of entry influences downstream retail prices; Bertrand or local monopoly pricing or a mixed strategy equilibrium may emerge. Importantly, entry may involve too much or too little roll-out from a social perspective, thus suggesting that regulatory intervention may be appropriate to achieve desired levels of competition in such settings.