Entry, Costs Reduction, and Competition in the Portuguese Telephony Industry

Abstract

We study the e¤ect of entry on costs and competition in the Portuguese mobile telephony industry. We construct and estimate a model that includes demand, network, and cost equations. The latter accounts for ine¢ ciency and cost reducing e¤ort. Our results suggest that the entry of a third operator in 1998 lead to signi cant cost reductions, and fostered competition. We also show that failure to account for cost reducing e¤ort leads to biased estimates of competition in the industry. Finally, we also nd that our estimated price-cost margins are similar to hypothetical Nash margins, if rms are patient, and have optimistic beliefs about the industry growth.