The Effect of Market Structure on Cellular Technology Adoption and Pricing

Abstract

We analyze the effect of entry on the technology adoption and calling plan choices of incumbent cellular firms. Focusing on the time period from 1996, when incumbents enjoyed a duopoly market, to 1998, when they faced increased competition from personal communications services (PCS) firms, we relate the adoption of digital technology and change in the breadth of calling plans to the amount of PCS entry experienced in different markets. Variation in geographic features contributes to the difficulty of building a sufficiently large wireless infrastructure network, providing effective instruments for endogenous entry decisions. Our results indicate that incumbents are more likely to upgrade their technology from analog to digital in markets with more entry. Consistent with increased digital technology adoption in more competitive markets, we find that incumbents in the process of digital upgrading also phase out a larger number of analog calling plans and introduce a larger number of digital calling plans in less concentrated markets.

Keywords: nonlinear pricing, entry, technology adoption, Telecommunications, market structure, price discrimination, technology diffusion