Full Text

Entry Auctions and Strategic Behavior under Cross-Market Price Constraints

James J. Anton, James H. Vander Weide and Nikolaos Vettas

International Journal of Industrial Organization 20 (5): 611-630, 2002

Abstract: We examine how universal service provisions and price restrictions across markets impact strategic entry and pricing. We develop a simple multi-market model with an oligopolistic (profitable) urban market and entry auctions for (unprofitable) rural service. Cross-market price restrictions induce a firm operating in both markets to become a 'softer' competitor, thus placing the firm at a strategic disadvantage. When we account for entry incentives and strategic bidding, the downstream strategic disadvantage becomes advantageous, leading to higher prices and profits. Price restrictions may also put outside firms, even relatively inefficient ones, at a strategic advantage.