Collusion in a Telecom Market in Which the Entrant Raises the Price in Return for a Discount in Interconnection Charges by the Incumbent

34 Pages Posted: 26 Oct 2016

See all articles by Il-Chong Nam

Il-Chong Nam

Korea Development Institute (KDI) - KDI School of Public Policy and Management

Date Written: September 1, 2016

Abstract

In 2003, the dominant former monopolist, which was subject to a stringent price regulation, and the new entrant in the local calls market of Korea made an agreement in which the entrant was to raise the price while the incumbent was to hand over market shares or transfer money using interconnection charge payment settlement as a channel. The antitrust authority and the court in Korea ruled the agreement to be collusive and imposed a heavy fine. The agreement has extraordinary features as a collusion agreement, as it specified that only one firm was to raise the price while the other firm was to transfer market shares or money. This paper develops a model of repeated Bertrand competition in a homogeneous market that captures the key elements of the local calls market in the early stage of deregulation to analyze the possibility of a collusion in which the unregulated firm raises the price while the regulated firm transfers market shares or money to the unregulated firm. The model assumes subscriber-based competition, the presence of switching costs, and asymmetry in the initial subscriber base and costs between the incumbent and the entrant. We found that there exists a subgame perfect equilibrium, in which the entrant raises the price above its optimal price against the regulated price of the incumbent in the mature stage of competition, and where the incumbent reciprocates by transferring money or market shares to the entrant.

Suggested Citation

Nam, Il-Chong, Collusion in a Telecom Market in Which the Entrant Raises the Price in Return for a Discount in Interconnection Charges by the Incumbent (September 1, 2016). Available at SSRN: https://ssrn.com/abstract=2836791 or http://dx.doi.org/10.2139/ssrn.2836791

Il-Chong Nam (Contact Author)

Korea Development Institute (KDI) - KDI School of Public Policy and Management ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

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