Collusive Conduct in Duopolies: Multimarket Contact and Cross-Ownership in the Mobile Telephone Industry

The deregulation of the telecommunications industry has resulted in a variety of industry structures which have been created in the hope of increasing competition. One example is the licensing of cellular telephone services in the United States. In the face of scarce radio spectrum, the Federal Communications Commission (FCC) has created duopolies in which two firms are granted licenses to compete in strictly defined product and geographic markets. Rate regulation typically imposed for natural monopolies is forgone because it is believed that two firms provide sufficient competition to prevent collusive pricing. We test this assertion using data collected from the cellular telephone industry in the United States. Taking advantage of the unique regulatory environment, we propose a structural model of market power and test to what degree duopolistic competition leads to competitive market outcomes. We find that cellular prices are significantly above competitive, as well as non-cooperative duopoly levels. Substantial welfare gains can be achieved through price reductions. We also find considerable variance in pricing behaviour across markets and operators. In a second step we explain the identified conduct in terms of various market and organizational structures that might explain competitive behaviour. We find that cross-ownership and multimarket contact are important factors in explaining non-competitive prices. Policy implications are also discussed.