Parent Company Influence on Local Market
Competition in Cellular Telephone
Hugh S. Fullerton, Ph. D.
Department of Media Studies
Radford University
Radford, Virginia 24142
Phone: (540) 831-6041
E-mail: [log in to unmask]
Prepared for submission to the
Media Management & Economics Division
Association for Education in Journalism and Mass Communication
1998
Parent Company Influence on Local Market
Competition in Cellular Telephone
Hugh S. Fullerton, Ph. D.
Department of Media Studies
Radford University
Radford, Virginia 24142
ABSTRACT
The duopoly market structure of the cellular telephone industry provides
conditions under which competition can occur. However, large telephone
companies own multiple cellular systems. To determine the extent to which
these companies influence competition on the local level, four indicators of
competitive behavior were compared over a seven-year period in the first 30
markets. The study concludes that cellular affiliates owned by the same
company tend to use similar competitive strategies. Different companies,
however, utilize differing competitive strategies at the local level.
Parent Company Influence on Local Market Competition in Cellular Telephone
Parent Company Influence on Local Market
Competition in Cellular Telephone
As the Federal Communications Commission and state regulatory agencies grope
for ways to encourage competition in telecommunications, it is becoming
increasingly clear that deregulation by itself is not a panacea. The FCC has
found that it must write thousands of pages of rules to guide the transition of
telecommunications from a highly regulated monopoly industry to a relatively
free, competitive marketplace. Different segments of the industry, like
wireless telephony, cable, and satellite, may require different approaches.
Regulators are becoming increasingly aware that they lack the information
possessed by the firms they regulate, and therefore are hampered in their policy
making and oversight functions (Laffont & Tirole, 1993). The regulators are
also hampered by multiple, sometimes conflicting, objectives. In addition to
attempting to design regimes to promote price competition, regulators and policy
makers must insure that service quality is maintained, universal access is
facilitated, and needs of small users are addressed. Thus, the task becomes
far more complicated than just eliminating regulation and allowing the free
market to determine the results.
In an early attempt to reduce regulation, the FCC created a two-firm or
duopoly market structure in several hundred new cellular telephone markets in
the U. S. Although the decision to go with the duopoly structure seems to have
been made as much on political grounds as economic ones,[1] the result is an
unusual laboratory for the study of firm behavior in a duopoly situation.
When it created the local duopoly structure, the FCC appeared to be signaling
that one firm in each market should be owned by the established wireline
telephone company, and the other by an independent provider.[2] In the
metropolitan markets, however, a pattern soon developed that many of the
non-wireline cellular providers would be owned by other large, multimarket
telephone firms, not local startups.
Of the non-wireline services in the first 30 metropolitan markets to be
opened for cellular in the mid-1980s, seven were operated by subsidiaries of
traditional telephone companies that provided local wireline service in their
home regions, and eight were run by McCaw Cellular, a major national player in
the cellular telephone industry. So only half of the non-wireline vendors in
the first 30 markets could be considered independent, more-or-less local firms.
Thus, in nearly one-fourth of these original large markets, we see the spectacle
of the entrenched local phone company operating one cellular system, and facing
competition from a "non-wireline" vendor that is a subsidiary of another
telephone giant from a different region of the country. Another quarter of the
markets had non-wireline vendors backed by a large national competitor that
specialized in cellular service.
Although far from perfect competition, duopoly market structure offers at
least the possibility of competition, and the benefits to the consumer that
competition might offer. In decreeing that local cellular markets would be
duopolies, the FCC was attempting to substitute competition for regulatory
oversight as a means of protecting public interests. The first 30 metro
markets, however, often proved to be local battlegrounds for corporate giants,
not separate prizefights between local players. Since large phone companies
dominated these markets, the influence of the parent firms on competition at the
local level becomes an important issue.
This paper will be concerned with the influence that corporate ownership
might have on the competitive behavior of the duopoly operators at the local
level. Using a proprietary data set which includes all firms entering the
original 30 markets during the first seven years of cellular phone service (A
History of Cellular Airtime Pricing, January 1985-January 1991), comparisons
across the period can be made of several types of behavior that could be
considered competitive. To investigate the question of corporate influence on
local competitive behavior, the study will test the following:
Hypothesis: Local cellular phone firms will tend to show
similar patterns of strategic competitive behavior if they are
owned by the same parent company.
Literature Review
Competition, being an abstract, can be difficult to pin down. Economists
and policy makers use the term freely, yet they are not necessarily talking
about the same thing. Even when the concept is agreed upon, it is difficult to
put in tangible terms. How do we know when competition is taking place? The
disparity in meaning is discussed by Brenner (1987), who notes that the
economists' view of competition is a long way from that held by the typical
business executive. Competition in economic terms is a situation with so many
firms that the individual firm has little or no influence over prices. The
businessman, however, sees competition as a rivalry situation, and the outcome
depends very much on the skill of business management in performing better than
its rivals in the marketplace. Adams (1990) observes that the term competition
is used both in reference to specific market structure and to the activity
between competitors.
As Brenner explains it: "Businessmen pursue strategies to discover a
combination of customers and services with respect to which they have an
advantage over those whom they perceive as their competitors." (1997, p. 49)
From the business perspective, competition is a game, albeit a very serious
one.[3] As far as the consumer is concerned, the best situation could be to
have very strenuous competition, in the business sense, in order the force
prices to their lowest levels, insure high quality service, and encourage
innovation.
Research on competitive behavior has been divided generally into three areas:
pricing actions, product actions, and advertising aimed at differentiation
(Smith, Grimm & Gannon, 1992). Product actions in cellular telephone are
limited by technical and market considerations, but firms are free to apply
price actions at the market level, as well as employ advertising intended to
establish an advantage on the basis of firm reputation or service superiority.
This study examines both price actions and actions related to products and
promotion.
Basic business strategy and corporate culture of the parent firm are
considered important determinants of the firm's behavior (Smith, Grimm & Gannon,
1992; Pearce & Robinson, 1985; Kotter & Heskett, 1992; Whittington, 1993).
Kotter and Heskett note that corporate culture may take its lead from the
pattern set by top management, but it also reflects what is done at the level of
lower units, such as divisions. They discern no set pattern regarding the
relative influence of top management and the smaller unit in setting common
values or behavioral norms. Their studies show, however, the organizational
culture has a strong role in the performance of the corporation. In
particular, corporate cultures that inhibit change, and therefore restrict
growth and adaptation, can serve to limit the long range success of the
organization.
The firm's culture, in turn, may determine whether a strategy coming from top
management is successful or not. If the strategy is consistent with the
culture, or if the culture can adapt to the strategy, the firm may be
successfully implement the strategy and ultimately achieve the desired goals.
If the culture and strategy are at odds, the strategy is likely to be
undermined.
Duopoly often is presented as a simplified form of oligopoly, and used to
test and demonstrate various aspects of oligopoly theory. In the real world,
however, duopoly exists only occasionally, and most duopoly markets are not
thoroughly isolated from overlapping markets. A town may have two shoe stores,
for instance, but the residents can patronize optional sources if they drive out
of town or shop by catalog. Under such conditions, it is difficult to test
theories of duopoly or oligopoly using empirical means.[4] Local markets
cellular markets, however, are well-defined duopolies with no competition from
outside and, at least until recently, no close substitute services.
Duopoly markets in cellular telephone create conditions under which spirited
competitive behavior can take place (Fullerton, 1998). This study examined
competitive behaviors, including pricing, in the first 30 markets to offer
cellular service in the U.S. (For analytical purposes, the markets were
collapsed to 28, because in two cases, both the competing firms and their prices
were identical in contiguous markets) In most of the markets, prices declined
over the initial six-year period, on an inflation-adjusted basis. However,
behavior patterns of the competing firms varied widely from market to market.
In some markets, there appeared to be vigorous price competition. Other
markets showed little evidence of price competition, but exhibited other types
of behavior which could be considered competitive, such as offering service
enhancements to suggest product differentiation, and targeting market segments
with special pricing packages. These findings suggest that factors other than
market structure influence both the type of competitive strategies that firms
adopt and the intensity with which firms compete in a particular market.
Adams (1990) examined entry strategy in cellular markets from the perspective
of rivalry theory. The markets he studied showed that cellular firms changed
pricing strategies frequently, but he found no support for rivalry theory based
hypotheses in the determination of competitive behavior.
Ruiz (1994), using an extensive data set from a single time period, tested
hypotheses on the effects of product differentiation, capacity constraints,
regulation, and multimarket interaction on cellular telephone pricing. She did
not find statistical support for hypotheses related to regulation, product
differentiation or multimarket interaction. Tests for the effect of capacity
constraints produced contradictory results.
Neoclassical economic theory says that a duopoly makes it possible to have
competition, and therefore lower prices, than a monopoly, but that prices will
be higher than would be the case under conditions of perfect competition.[5]
Recent analyses indicate that the degree of competition within an oligopoly (of
which duopoly is a special case) will be related to the disposition of firm
managements toward cooperation or strenuous rivalry. (Adams, 1990; Shapiro,
1989; Smith, Grimm & Gannon, 1992)
Neoclassical theory, however, has difficulty dealing with a more complex
situation where a relatively small number of companies engage in an industry on
a national scale, but face each other only through duopoly local markets. In
the case of cellular telephone in the early metro markets, a large firm would
face one competitor in one local market, but a different competitor in a
different market. Competitor #1 might be inclined to passively accept prices
set by another firm, while competitor #2 might prefer to use aggressive action
to expand market share. It was a bit like a barroom brawl in an old Western
movies, where the hero knocks out one outlaw on one side, only to turn around
and find a different one coming at him from a different direction.
The intensity of competition, however, may depend less on market structure
than on the attitudes and perceptions of the market participants. Brenner
characterizes this distinction as subjective on the part of firm managers,
depending on whether the firms' decision makers consider other firms as rivals
or perceive threats of market entry. Absent these views, an oligopolistic
market may not show characteristics of strong competition.
Methodology
Basic business strategy and corporate culture of the parent firm are
considered important determinants of the firm's behavior (Smith, Grimm & Gannon,
1992; Pearce & Robinson, 1985; Kotter & Heskett, 1992). If the corporate
influence extends these factors to the local level, cellular affiliates owned by
the same parent company should show similar patterns of competitive behavior,
such as the following:
Pricing actions:
1. Aggressive reduction of cellular phone prices, or conversely,
resisting the reduction of prices.
2. Undercutting rates offered by the competing firm in the market.
Product and promotional actions:
1. Offering more service features, especially such enhancements
offered without extra charges.
2. Offering more pricing plans, to appeal to more segments of the
market.
Data that reflect each of these four competitive behaviors were used to
construct measures reflecting the intensity of the behaviors. Three different
pricing packages were designed to determine the representative per-minute price
for three customer profiles: Small, occasional customers, using 50 minutes or
less per month; medium-use customers, using 200 minutes per month; large
customers, using 500 minutes per month. These rates were extracted for each
profile for each firm for each year. Although some customers use far more than
500 minutes per month, in most markets and at most points in time the package
that best served the 500-minute customer also best served larger customers.
The customer price data were then used to construct measures of the four types
of competitive behavior:
Price Performance Index
The Price Performance Index (PPI) was constructed to measure the price
performance of each firm, adjusted for inflation as reflected in the Consumer
Price Index (CPI). The PPI is computed for each year except the initial one,
comparing that year's price for each customer profile with the year preceding.
This comparison is then adjusted for that year's increase in the Consumer Price
Index (CPI). The sign is reversed, so that prices that decrease have a
positive sign, and those that rise are negative. Although price performance is
a not necessarily a direct sign of competitive behavior, cellular firms in the
Fullerton (1996) study generally reduced prices over the six-year period.
Price Difference Rating
The gap between prices charged by competing firms is an indication of their
respective competitive strategies. Fullerton noted that price differences were
frequent in some cellular markets and rare or nonexistent in others.
Neoclassical economics focuses on pricing strategy as both a technique of
vendors and a signaling mechanism to other participants and observers. If a
company is attempting to wrest market share from its competitor, we would expect
it to use pricing strategy as a major tool.
Pricing strategy can serve other purposes, of course. If demand is
inelastic, profits can be increased by increasing prices. In complex
situations, firms may choose to manipulate prices, taking into consideration the
possible strategic responses of their competitors (Brenner, 1987; Rasmusen,
1994).
The gaps between the prices that competing firms charge for comparable
services may indicate their attempts to outmaneuver their competitors, while
trying to maintain or increase profits. The size and persistence of price
differences is one sign of the intensity of competition in a market, and the
relative position of each participating firm is an indicator of its own
competitive strategy.
Differences between posted prices for comparable service bundles of the two
competing firms were tracked in each of the 30 cellular markets.[6] A
difference of 10 percent of the lower firm's price was arbitrarily selected as
being significant and therefore indicative of serious competition. The study
recorded the number of times at which a 10 percent or more difference in price
was recorded at each service level, and which firm posted the higher price at
each point.
The 60 local operations were classified according to the following Price
Difference Rating (PDR) classifications:
No Competition (NC): Prices for comparable service classes less than
10 percent different on at least 90 percent of reporting dates. Prices
identical on at least 50 percent of reporting dates.
Low Competition (LC-1, LC-2, LC-M): Price differences of less than
10 percent on at least 90 percent of reporting dates, but different on
more than 50 percent of dates. Firms designated LC-1 reported higher
prices on 50 percent or more of reporting dates. M indicates neither
firm consistently posted higher prices.
Moderate Competition (MC-1, MC-2, MC-M): Price differences of at
least 10 percent on 10 percent to 59 percent of reporting dates. Firms
designated MC-1 had higher prices on 50 percent or more of reporting
dates. M indicates neither firm consistently posted higher prices.
High Competition (HC-1, HC-2, HC-M): Price differences of at least
10 percent on 60 percent or more of reporting dates. Firms designated
HC-1 had higher prices on 50 percent or more of reporting dates. M
indicates neither firm consistently posted higher prices.
Restated, the coding designations are as follows:
NC No significant price competition in market.
LC-1 Firm posting higher prices in market with low price competition.
LC-2 Firm posting lower prices in market with low price competition.
LC-M Market with low price competition, no firm consistently high or low.
MC-1 Firm posting higher prices in market with moderate price competition.
MC-2 Firm posting lower prices in market with moderate price competition.
MC-M Market with moderate price competition, no firm consistently high or low.
HC-1 Firm posting higher prices in market with high price competition.
HC-2 Firm posting lower prices in market with high price competition.
HC-M Market with high price competition, no firm consistently high or low.
Number of Pricing Plans
Most cellular firms began business with a small number of pricing plans,
usually no more than three, and often only one. In their efforts to segment
their customers into identifiable groups, virtually all firms substantially
increased the number of pricing plans, until several were offering eight or
more. In some cases, firms reduced the number of pricing plans after several
years.
Use of multiple pricing plans is typical of a market segmentation strategy,
and has often been applied in other utility and transportation industries.
Segmentation may be used as a competitive strategy, or as a strategy to
delineate niche markets or strengthen price levels by taking advantage of
inelastic demand.
The absolute number of pricing plans offered by each firm at the retail level
was used as the pricing plan indicator.
Free Features Index
During the early expansion period of cellular, it became increasingly common
for firms to offer optional extra features as enhancements to their services.
Examples of these enhancements are call waiting, call forwarding, voice mail,
and special billing. In many cases, these were comparatively simple and
inexpensive software upgrades, but customers found them to be of value. By the
end of the period, all 56 firms were offering a variety of such special
features, and many offered 8 to 10 or more. In some cases, vendors charged
extra for such features, but many were also offered free, presumably for
promotional purposes.
Because cellular service is quite standardized, operating within rigid
technical constraints, it is difficult to differentiate the product. Offering
special features, especially without charge, may be regarded as one method of
differentiating a service from its competitor.
The free special feature strategy is operationalized in the Free Features
Index (FFI). This simple index is computed by dividing the number of services
offered free by the total number of special services offered. The higher the
index, the more vigorously the firm is attempting to differentiate its service
by offering free service enhancements.
Following computation of the four measures, the 56 local cellular firms in
the first 30 markets are rank ordered on the basis of the Price Performance
Index, the Number of Pricing Plans, and the Free Features Index. The firms are
also classified according to the Price Difference Ratings. Results are shown
in Tables 1-3.
Findings
Eleven firms owned more than one local cellular system each in the first 30
markets, and the number of local system affiliates under a single ownership
ranged from two to eight. Seven of the companies owning more than one system
were regional Bell operating companies (RBOCs). The others were General
Telephone & Electronics, which also operated local wireline phone systems, McCaw
Cellular, the largest national operator of cellular systems at the time, and two
smaller companies, Bay Area Cellular and Cellular Communications, each of which
owned just two systems in the initial 30 markets. Three of the RBOCs also
owned a total of seven non-wireline cellular systems in markets outside their
home regions.
All of the RBOCs and GTE operated local wireline systems in their home
territories. The largest multiple owner, however, was McCaw Cellular with
eight systems, all non-wireline. The average number of local systems owned by
multiple owner firms was 4.45.
In exactly half of the 30 markets, the non-wireline systems were owned by
independent firms, meaning they were not RBOCs, nor were they GTE or McCaw
affiliates. No wireline systems were owned by independents, which is to be
expected.
A market-by-market examination of the competitive behaviors of the local
cellular systems affiliated with major corporations shows the following:
Ameritech affiliates tended to be among the highest priced in their
respective markets, yet over time, they were among those reducing prices the
most. In three of their four markets, Ameritech affiliates ranked in the upper
half of all cellular firms in the steady reduction of prices over the six-year
period. The same three markets were rated highly competitive in the Price
Difference ratings, but the Ameritech affiliate was always the higher priced of
the two firms. The fourth Ameritech market was rated noncompetitive on the
Price Difference ratings, and the firm there was in the lowest-performing
quartile on the Price Performance Index. Three of the four were in the top
quartile in the Number of Pricing Plans offered, and all were near the middle on
the FFI scale.
Bell Atlantic's four local cellular affiliates in this study all rated in the
lower half on the PPI scale, indicating they reduced prices less than the
majority of other firms in the original 30 markets. Two of Bell Atlantic's
three cellular firms operated in markets which were noncompetitive on the PDR,
but the other was the lower-priced firm in a moderately competitive market.
All Bell Atlantic affiliates were in the top quartile on the FFI, because they
made liberal use of free features.
All three BellSouth affiliates were in the top half of firms on the PPI, so
all three made substantial price reductions over the period. All three were in
the lower half both in the number of pricing plans offered and on the FFI,
showing that they were less likely than most to use non-price-related
competitive tactics. Their record on the PDR was mixed.
GTE owned wireline cellular providers in seven markets (considering San
Francisco-San Jose as two markets). In all of those markets except San
Francisco-San Jose, the GTE vendor was in the first or second quartile on the
PPI list, indicating that prices were reduced substantially over the six-year
period. On the Price Difference Ratings, however, GTE affiliates rated all the
way from NC (no competition) to HC-2 (lower priced competitor in a highly
competitive market), the two extremes on this measure. In number of plans, GTE
affiliates were generally toward the low end, with six of the seven affiliates
in the third or fourth quartiles. GTE affiliates were also spread on the FFI
index, with two affiliates each in quartiles 1 and 3 and three in the second
quartile.
The local affiliates of McCaw Cellular, the only company exclusively
operating cellular systems on a nationwide basis in the early years, showed no
discernible patterns of competitive behavior. It should be noted that McCaw
operated only non-wireline systems, and therefore often entered a market after
the local phone company had a well-established cellular system. On all three
numerical scales, McCaw affiliates fell into every quartile. The markets where
McCaw operated rated from highly competitive to non-competitive on the Price
Difference Ratings. The McCaw affiliate in Portland was highest in the nation
on the PPI, showing the greatest reduction in prices over the period it was in
business. Yet the same affiliate tied for last place on the FFI. Only in the
number of pricing plans offered did McCaw affiliates show some consistency, with
six of its eight affiliates in the top half.
NYNEX's three affiliates, all in the Northeast, followed a fairly
conservative pattern. All were in the middle of the pack on price reductions
and free features. Only the Buffalo affiliate was in the top quartile in the
number of pricing plans offered. Two of the three were involved on moderately
competitive markets. but were neither consistently high nor low. The New York
affiliate operated in a highly competitive market, where it was the higher
priced firm.
PacTel was one of the three RBOCs that also operated non-wireline systems
outside of its home region. Both of its wireline affiliates were in
California, a state that had a curiously poor record of competitive performance
(Fullerton, 1998). Its two non-wireline affiliates were in Atlanta and
Detroit, two very different markets. Atlanta was a noncompetitive market, the
only one of the 30 with completely identical prices during the period two firms
were active. Atlanta prices were also stable, which means that, adjusting for
inflation, they went down only moderately. PacTel's Atlanta affiliate ranked
first in the country on the FFI, and very high on the number of price plans
offered. The Detroit market was a highly competitive one according to the
Price Differences Ratings, and the PacTel affiliate was the lower priced vendor.
However, this did not result in substantially declining prices. Although the
Ameritech competitor reduced prices at several junctures, the PacTel affiliate
raised prices on several occasions as well as reducing them. As a result, the
PacTel affiliate in Detroit ranked 44th in the country on the PPI.
Southwestern Bell moved into non-wireline aggressively, complementing its
three wireline affiliates with four out-of-region non-wireline firms
(considering Baltimore and Washington as separate markets). The strategies
used by its wireline affiliates seem to be quite different from the non-wireline
ones, however. The three wireline systems were in the bottom half of all firms
on the PPI, the FFI, and the number of pricing plans. Two of their markets were
noncompetitive. The third one was the higher priced firm in a moderately
competitive market. The non-wireline affiliates, however, ranked generally
higher by all four standards of comparison. Two were in the top half on the
PPI, two were in the top half in number pricing plans, and all four operated in
moderately competitive or highly competitive markets, as judged by the PDR.
Since the Price Difference Rating is heavily influenced by the interaction of
the two firms in a market, it can be inferred that Southwestern Bell's entry was
an important factor in making those four markets competitive.
US West operated four wireline affiliates and one non-wireline system, in San
Diego. By most measures, its affiliates were near the middle, but rarely in
the bottom quartile. Three of its affiliates were in the top quartile on the
FFI. According to the Price Difference Ratings, four of the markets served by
US West were highly competitive, and one moderately competitive. In two of
these markets, the US West affiliate was the lower priced firm, and in two other
markets, neither firm was consistently the lower one. The conclusion can be
drawn that US West affiliates actively pursued a practice of adjusting prices
for competitive reasons.
The 13 independent firms (one serving two contiguous service areas in the San
Francisco Bay area and one serving two Ohio markets) had very mixed records.
Since all of them faced systems affiliated with RBOCs or GTE, this is not
surprising, as they had the task of adjusting their competitive strategies to a
well-known local competitor. In terms of the PPI, seven were in the top half
of all firms and six in the lower half. Six were in the upper half in numbers
of pricing plans offered, and seven in the lower half. Five were in the upper
half by the FFI, eight in the lower half. Seven were in markets deemed
noncompetitive in terms of the Price Difference Ratings, yet five were in highly
competitive markets. Four of those five in highly competitive markets were the
lower-priced firms in their markets.
Discussion
Although the samples for each company are limited in number, and the
behaviors quite idiosyncratic in nature, two patterns are quite apparent:
1. Affiliates owned by a particular parent company often share
characteristic competitive behaviors.
2. There are substantial differences in typical competitive behavior
between affiliates downed by different companies.
In general, we surmise that affiliates of Ameritech, Bell Atlantic and NYNEX
tended to be quite conservative in nature. These companies' affiliates
generally posted higher prices than their competitors in the same markets, and
reduced prices less dramatically than other firms during the period under study.
BellSouth affiliates were not very competitive, but they did reduce prices more
than most over the six-year period.
Affiliates of GTE were more aggressive in general, participating in markets
with higher levels of competition and reducing prices more than many others.
McCaw Cellular affiliates also showed signs of vigorous competition, but price
reductions varied by market. In general, the practices of McCaw affiliates
were less consistent than affiliates of RBOCs and GTE.
Affiliates of PacTel, Southwestern Bell and US West resisted price reductions
more than most others, yet they participated in many markets where price
differences often indicated high or moderate competition. All three firms also
operated non-wireline as well as wireline related systems. In most cases,
their wireline systems were more conservative than their non-wireline
affiliates.
No generalizations can be made about independent local operators. Some
exhibited very competitive behavior, while others showed few signs of
competitive behavior. In competitive markets, the non-wireline systems were
much more likely to be the lower priced firm.
Conclusions
Corporate ownership appears to have a substantial influence on the tendency
of local cellular systems to behave in various manners indicative of
competition.
In the case of most of the RBOCs and GTE in the first 30 American cellular
markets, the competitive behaviors of local affiliates showed strong
similarities when they were owned by the same parent firm. Some local
affiliates operated in very conservative fashion, others were more aggressive in
their competitive behaviors. Some were prone to use price-related competitive
tactics, while others relied more on service or marketing-oriented techniques.
Available data do not indicate whether these behavioral similarities were
associated with intentional strategies on the part of the parent companies, or
whether local affiliates adopted patterns of behavior consistent with the parent
firms' corporate cultures.
Local vendors not affiliated with RBOCs or GTE exhibited no such
similarities, however. Affiliates of McCaw Cellular were strikingly dissimilar
in patterns of competitive behavior, as were the 13 independent firms that
provided non-wireline service in 15 markets.
Further research
At least one avenue remains to be explored in efforts to explain patterns of
competitive behavior by local cellular telephone providers. This is the
possibility that the timing of entry into the local market may play a role. The
first mover advantage is often cited in game theory literature, as is the role
of price-taker in the oligopoly literature. In the case of local cellular
markets, a lag of anywhere from a few months to a year or more often occurred
between the time that the first vendor offered service and its competitor became
operational in the market. In most cases, the first vendor to offer cellular
was also the affiliate of the local wireline phone service provider, and
probably benefited from the regional reputation of the parent firm.
[1] For accounts of the FCC cellular duopoly market decision, see Calhoun,
1988; Davis, 1988; and Hardman, 1982.
[2] Although most "wireline" providers are owned by the local wireline
telephone company serving the market, a few declined to operate the cellular
wireline-affiliated systems in their service areas and allowed other firms to do
so. None of the local telephone companies in the first 30 metropolitan markets
declined to provide cellular service, however.
[3] Game theory might offer some insights into the behavior of local cellular
telephone vendors. See Rasmusen (1994) for a readable, applied introductory
review of game theory. Note especially the discussion of pricing under duopoly
market structure in Chapter 13. Game theory is considered to have been
established as a area of academic research by Von Neumann and Morgenstern
(1944).
[4] For example, Friedman (1983) uses duopoly examples frequently in his
comprehensive work on oligopoly, but rarely treats it as a distinct case.
Others, such as Anderson and Engers (1992), and Geroski, Phlips, and Ulph
(1985), examine theoretical aspects of oligopoly and duopoly. Among the few
data-based studies of duopoly are Ng (1991), and Hazlett (1990). Stoetzer and
Tewes (1996), examine the German cellular telephone case, which is made somewhat
imprecise by the availability of possible substitute technologies.
[5] Friedman, op cit., examines the leadership models that may characterize
duopoly, including the Cournot, Bertrand and Stackelberg models. Under the
Cournot model, firms in a duopoly would produce more than a firm under monopoly
but less than those under perfect competition. Price should be less than the
monopoly price and more than the pure competition price. Oligopoly profits are
higher under Cournot conditions than under Stackelberg (Anderson and Engers, op.
cit.). Product differentiation or other non-price competition may blunt the
impact of price competition, to the point that a firm may successfully ignore
its competitors' behavior in setting price or output (Geroski, Phlips & Ulph,
op. cit.). Even if price competition in a duopoly is not anticipated, consumer
surplus should be greater than what it would have been under a monopoly, because
duopolistic firms will still compete on the basis of service (Ng, op. cit.).
Friedman notes that the nature of the industry determines which model is the
best approximation of the actual situation. Some types of businesses find it
relatively easy to adjust prices, but may be limited by high fixed capacity or
high costs of adjusting output. Other industries may find it comparatively
easy to adjust output, and have relatively less price flexibility. In the case
of the Stackelberg model, industry structure and culture may indicate a dominant
firm which is likely to behave like the leader. Different firms in an industry
may take the role of leader at different times.
[6] In some markets, the period for which prices are compared is less than six
years, because the firms did not begin operations at the same time.
Table 1. Summary of Findings by Market
Owner Price PPI Price Ave. Number Free FFI
Perf. Rank Diff. No. of Plans Feat. Rank Index Rating Plans Rank Index
ATLANTA - WL BellSouth 6.40 11 NC 3.86 38 (tie) 0.13 47
ATLANTA - NWL PacTel 4.77 24 (tie) NC 5.75 10 0.90 1
BALT-WASH - WL Bell Atlantic 1.40 49 MC-2 5.57 14 (tie) 0.59 12
BALT-WASH - NWL SW Bell 5.78 18 MC-1 6.86 3 0.53 15
BOSTON - WL NYNEX 3.04 5 MC-M 5.00 18 (tie) 0.26 41
BOSTON - NWL SW Bell 7.63 41 MC-M 3.71 41 0.33 33 (tie)
BUFFALO - WL NYNEX 3.67 38 MC-M 5.86 6 (tie) 0.36 28 (tie)
BUFFALO - NWL Buffalo Tel 1.29 50 (tie) MC-M 5.57 14 (tie) 0.25 42 (tie)
CHICAGO - WL Ameritech 8.90 4 HC-1 5.71 11 (tie) 0.35 30
CHICAGO - NWL SW Bell 4.30 30 HC-2 5.57 14 (tie) 0.30 39 (tie)
CINCINNATI - WL Ameritech 2.24 47 NC 6.17 5 0.45 19 (tie)
CINCINNATI - NWL Cell. Comm. 1.29 50 (tie) NC 3.80 40 0.07 49 (tie)
CLEVELAND - WL GTE 6.32 13 LC-M 2.57 51 (tie) 0.34 31 (tie)
CLEVELAND - NWL Cell. Comm. 3.93 35 LC-M 3.00 46 (tie) 0.34 31 (tie)
DALLAS - WL SW Bell 2.36 46 NC 2.57 51 (tie) 0.09 48
DALLAS - NWL Metrocell 6.88 7 NC 4.80 21 (tie) 0.51 16
DENVER - WL US West 4.11 33 HC-M 4.00 36 (tie) 0.74 5
DENVER - NWL McCaw 6.08 16 HC-M 5.00 18 (tie) 0.32 35 (tie)
DETROIT - WL Ameritech 6.00 17 HC-1 5.86 6 (tie) 0.37 27
DETROIT - NWL PacTel 2.56 44 HC-2 4.50 24 0.05 51
HOUSTON - WL GTE 7.23 6 HC-2 4.29 26 (tie) 0.39 24
HOUSTON - NWL Houston Cell. 4.48 28 HC-1 3.00 46 (tie) 0.17 46
INDIANAPOLIS - WL GTE 6.48 9 HC-M 4.14 30 (tie) 0.31 37 (tie)
INDIANAPOLIS - NWL Ind'polis Cell. 9.23 2 HC-M 5.71 11 (tie) 0.31 37 (tie)
KANSAS CITY - WL SW Bell 1.60 48 MC-1 4.14 30 (tie) 0.24 44
KANSAS CITY - NWL McCaw 6.30 14 MC-2 5.80 9 0.00 52 (tie)
LOS ANGELES - WL PacTel -2.21 54 NC 7.43 1 0.40 23
LOS ANGELES - NWL LA Cellular 4.77 24 (tie) NC 7.00 2 0.32 35 (tie)
MIAMI - WL BellSouth 5.72 19 MC-M 4.00 36 (tie) 0.00 52 (tie)
MIAMI - NWL McCaw 2.52 45 MC-M 6.25 4 0.00 52 (tie)
MILWAUKEE - WL Ameritech 4.65 26 HC-1 4.29 26 (tie) 0.36 28 (tie)
MILWAUKEE - NWL Mil'kee Cell. 4.52 27 HC-2 4.14 30 (tie) 0.00 52 (tie)
MINNEAPOLIS - WL US West 6.47 10 HC-2 3.57 42 0.55 14
MINNEAPOLIS - NWL McCaw 4.35 29 HC-1 4.57 23 0.64 9
NEW ORLEANS - WL BellSouth 6.36 12 LC-1 3.29 44 0.30 39 (tie)
NEW ORLEANS - NWL Radiofone 4.18 32 LC-2 2.33 53 0.38 25 (tie)
NEW YORK - WL NYNEX 5.61 21 HC-1 4.14 30 (tie) 0.44 21 (tie)
NEW YORK - NWL Metro One 3.92 36 HC-2 3.00 46 (tie) 0.63 10
PHILADELPHIA - WL Bell Atlantic 0.58 52 NC 4.86 20 0.75 4
PHILADELPHIA - NWL Metrophone 3.32 40 NC 4.80 21 (tie) 0.50 17
PHOENIX - WL US West 3.39 39 HC-1 4.29 26 (tie) 0.45 19 (tie)
PHOENIX - NWL Metro Mobile 6.29 15 HC-2 3.20 45 0.89 2
PITTSBURGH - WL Bell Atlantic 4.05 34 NC 3.86 38 (tie) 0.67 8
PITTSBURGH - NWL McCaw 9.02 3 NC 4.25 29 0.62 11
PORTLAND - WL GTE 5.71 20 MC-M 2.83 50 0.80 3
PORTLAND - NWL McCaw 11.88 1 MC-M 5.50 17 0.00 52 (tie)
ST. LOUIS - WL SW Bell 3.90 37 NC 4.14 30 (tie) 0.07 49 (tie)
ST. LOUIS - NWL Cybertel 5.60 22 NC 5.86 6 (tie) 0.21 45
SAN DIEGO - WL PacTel -1.11 53 HC-1 3.50 43 0.25 42 (tie)
SAN DIEGO - NWL US West 6.56 8 HC-2 1.20 56 0.71 6
SAN FRAN-S'JOSE WL GTE -2.71 55 NC 2.17 54 0.47 18
SAN FRAN-S'JOSE NWL Bay Area Cel. -3.09 56 NC 1.80 55 0.44 21 (tie)
SEATTLE - WL US West 2.73 42 MC-M 4.14 30 (tie) 0.68 7
SEATTLE - NWL McCaw 2.73 43 MC-M 5.67 13 0.33 33 (tie)
TAMPA - WL GTE 4.98 23 MC-M 4.43 25 0.58 13
TAMPA - NWL McCaw 4.24 31 MC-M 3.00 46 (tie) 0.38 25 (tie)
Mean of all firms 4.34 4.40 0.40
Table 2. Summary of Findings by Parent Corporation
Owner Price PPI Price Ave. Number Free FFI
Perf. Rank Diffe No. of Plans Feat. Rank
Index Rating Plans Rank Index
Ameritech CHICAGO - WL 8.90 4 HC-1 5.71 11 (tie) 0.35 30
4 WL CINCINNATI - WL 2.24 47 NC 6.17 5 0.45 19 (tie)
DETROIT - WL 6.00 17 HC-1 5.86 6 (tie) 0.37 27
MILWAUKEE - WL 4.65 26 HC-1 4.29 26 (tie) 0.36 28 (tie)
Bell Atlantic BALT-WASH - WL 1.40 49 MC-2 5.57 14 (tie) 0.59 12
4 WL PHILADELPHIA - WL 0.58 52 NC 4.86 20 0.75 4
PITTSBURGH - WL 4.05 34 NC 3.86 38 (tie) 0.67 8
BellSouth ATLANTA - WL 6.40 11 NC 3.86 38 (tie) 0.13 47
3 WL MIAMI - WL 5.72 19 MC-M 4.00 36 (tie) 0.00 52 (tie)
NEW ORLEANS - WL 6.36 12 LC-1 3.29 44 0.30 39 (tie)
GTE CLEVELAND - WL 6.32 13 LC-M 2.57 51 (tie) 0.34 31 (tie)
7 WL HOUSTON - WL 7.23 6 HC-2 4.29 26 (tie) 0.39 24
INDIANAPOLIS - WL 6.48 9 HC-M 4.14 30 (tie) 0.31 37 (tie)
PORTLAND - WL 5.71 20 MC-M 2.83 50 0.80 3
SAN FRAN-S'JOSE WL -2.71 55 NC 2.17 54 0.47 18
TAMPA - WL 4.98 23 MC-M 4.43 25 0.58 13
McCaw DENVER - NWL 6.08 16 HC-M 5.00 18 (tie) 0.32 35 (tie)
8 NWL KANSAS CITY - NWL 6.30 14 MC-2 5.80 9 0.00 52 (tie)
MIAMI - NWL 2.52 45 MC-M 6.25 4 0.00 52 (tie)
MINNEAPOLIS - NWL 4.35 29 HC-1 4.57 23 0.64 9
PITTSBURGH - NWL 9.02 3 NC 4.25 29 0.62 11
PORTLAND - NWL 11.88 1 MC-M 5.50 17 0.00 52 (tie)
SEATTLE - NWL 2.73 43 MC-M 5.67 13 0.33 33 (tie)
TAMPA - NWL 4.24 31 MC-M 3.00 46 (tie) 0.38 25 (tie)
NYNEX BOSTON - WL 3.04 5 MC-M 5.00 18 (tie) 0.26 41
3 WL BUFFALO - WL 3.67 38 MC-M 5.86 6 (tie) 0.36 28 (tie)
NEW YORK - WL 5.61 21 HC-1 4.14 30 (tie) 0.44 21 (tie)
PacTel ATLANTA - NWL 4.77 24 (tie) NC 5.75 10 0.90 1
2 WL DETROIT - NWL 2.56 44 HC-2 4.50 24 0.05 51
2 NWL LOS ANGELES - WL -2.21 54 NC 7.43 1 0.40 23
SAN DIEGO - WL -1.11 53 HC-1 3.50 43 0.25 42 (tie)
SW Bell BALT-WASH - NWL 5.78 18 MC-1 6.86 3 0.53 15
3 WL BOSTON - NWL 7.63 41 MC-M 3.71 41 0.33 33 (tie)
4 NWL CHICAGO - NWL 4.30 30 HC-2 5.57 14 (tie) 0.30 39 (tie)
DALLAS - WL 2.36 46 NC 2.57 51 (tie) 0.09 48
KANSAS CITY - WL 1.60 48 MC-1 4.14 30 (tie) 0.24 44
ST. LOUIS - WL 3.90 37 NC 4.14 30 (tie) 0.07 49 (tie)
US West DENVER - WL 4.11 33 HC-M 4.00 36 (tie) 0.74 5
4 WL MINNEAPOLIS - WL 6.47 10 HC-2 3.57 42 0.55 14
1 NWL PHOENIX - WL 3.39 39 HC-1 4.29 26 (tie) 0.45 19 (tie)
SAN DIEGO - NWL 6.56 8 HC-2 1.20 56 0.71 6
SEATTLE - WL 2.73 42 MC-M 4.14 30 (tie) 0.68 7
INDEPENDENTS
Bay Area (2) SAN FRAN-S'JOSE NWL -3.09 56 NC 1.80 55 0.44 21 (tie)
Buffalo Tel BUFFALO - NWL 1.29 50 (tie) MC-M 5.57 14 (tie) 0.25 42 (tie)
Cell. Comm. CINCINNATI - NWL 1.29 50 (tie) NC 3.80 40 0.07 49 (tie)
Cell. Comm. CLEVELAND - NWL 3.93 35 LC-M 3.00 46 (tie) 0.34 31 (tie)
Cybertel ST. LOUIS - NWL 5.60 22 NC 5.86 6 (tie) 0.21 45
Houston Cell. HOUSTON - NWL 4.48 28 HC-1 3.00 46 (tie) 0.17 46
Ind'polis Cell. INDIANAPOLIS - NWL 9.23 2 HC-M 5.71 11 (tie) 0.31 37 (tie)
LA Cellular LOS ANGELES - NWL 4.77 24 (tie) NC 7.00 2 0.32 35 (tie)
Metro Mobile PHOENIX - NWL 6.29 15 HC-2 3.20 45 0.89 2
Metro One NEW YORK - NWL 3.92 36 HC-2 3.00 46 (tie) 0.63 10
Metrocell DALLAS - NWL 6.88 7 NC 4.80 21 (tie) 0.51 16
Metrophone PHILADELPHIA - NWL 3.32 40 NC 4.80 21 (tie) 0.50 17
Mil'kee Cell. MILWAUKEE - NWL 4.52 27 HC-2 4.14 30 (tie) 0.00 52 (tie)
Radiofone NEW ORLEANS - NWL 4.18 32 LC-2 2.33 53 0.38 25 (tie)
Table 3. Summary of Evaluations by Parent Corporation
Firm PPI #Plans FFI Price Diff.
Quartile Quartile Quartile Ratings
Ameritech Most 1-2 1-2 2-3 High priced
Bell Atlantic 3-4 Vary Always 1 Most NC
BellSouth 1-2 3-4 3-4 Vary
GTE Most 1-2 Most 3-4 1-3 Most mixed
McCaw Cellular Vary Most 1-2 Varies Most mixed
NYNEX 2-3 Vary 2-3 Mixed
PacTel Most 4 Most 1-2 Varies Vary
Southwest. Bell Most 3-4 Vary Most 3-4 Vary
US West 1 or 3 Most 3-4 Most 1-2 Mixed
Independents Vary Majority 3-4 Majority 3-4 7 NC;
(inc. Cellular Comm.) Others vary
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