Pricing, increasing returns, and competition in cellular telephone service

This dissertation investigates two important aspects of competition in the cellular telephone industry—second-degree price discrimination and increasing returns to scale. Chapter 1 provides a brief overview of the United States cellular telephone service industry, highlighting its explosive growth and unique mix of competition and regulation. It also provides an introduction to the analyses in Chapters 2, 3 and 4. Chapter 2 is a theoretical chapter that sets forth a set of sufficient conditions that ensure the existence of a pure-strategy Nash Equilibrium in non-linear prices for a two-firm-market that is modeled on the US markets for cellular telephone service that existed from 1985 to 1990, the period examined empirically in Chapter 3. The key insight generated by Chapter 2 is that a pure strategy Nash equilibrium in prices and qualities is not guaranteed when there are opportunities for second-degree price discrimination. The problem occurs even when the consumer's preferences meet the standard conditions that ensure the existence of a pure-strategy equilibrium with differentiated products competition. The empirical analysis in Chapter 3 uses the economic model examined in Chapter 2 to specify a reduced-form hedonic price analysis of the US cellular telephone industry during the period 1985 to 1990. This empirical analysis examines changes in the per-minute rates charged by the service providers in each of 305 distinct geographic markets. It fords that the firms did indeed adjust their per-minute rates—the primary product feature with which they sort consumers by their willingness-to-pay for usage—in response to changes in the competitive environment in which they operated. The results confirm the general predictions of the economic model examined in Chapter 2. Chapter 4 is a second empirical analysis that uses data from the Federal Communication Commission's radio spectrum auctions to look for evidence that there are increasing returns to scale in the ownership of spectrum licenses. It finds that bidders in the Commission's first two auctions, for use in providing Personal Communications Service, bid more for licenses when they also bid for and ultimately won licenses in contiguous regions. The results indicate that there are complementarities between adjacent license regions.