| Using data from cellular telephony in 1992, I examine the relationship between product differentiation and the pricing policies of oligopolists in a setting where entry and differentiation are mainly exogenous. In the case of cellular products, I find a positive relationship between price discrimination and product differentiation that is robust to different specifications; however, I cannot refute the hypothesis that the relationship between price discrimination and product differentiation is nonlinear. This positive relationship is consistent with models of competitive price discrimination that predict that discrimination decreases as direct competition, say as a result of entry, increases.;In the case of cellular technology, overall market power does not increase as firms become more differentiated. My study finds a negative relationship between price levels and product heterogeneity. Although the finding of a negative relationship between differentiation and price levels may be the result of an inability to measure the true average price paid by consumers, the finding might also reflect a reduction in consumer valuation for cellular when coverage is not comprehensive.;I find it plausible that the more differentiated cellular carriers are, the more likely it is that cellular users will have a preference for a particular carrier. Hence, as differentiation increases, the cross-firm elasticities of demand that firms face decrease. Perhaps a decline in the cross-firm elasticities of demand enables firms to discriminate more in heterogeneous markets. However, as differentiation increases, consumer valuation for cellular services decreases. Increased differentiation engenders an increase in the industry elasticities of demand, constraining the level of cellular prices. From the examination of pricing policies in cellular telephony it is clear that price discrimination and price levels in oligopoly markets may not be easily characterized by conjecturing from models of price discrimination in monopoly markets. The introduction of the cross-firm elasticity of demand may produce effects that do not completely follow from intuition. Despite obstructions from unexpected effects and scarce theoretical work, I am confident that my findings contribute to the body of empirical work in the area of competitive price discrimination. |
