Competitive Non-Linear Pricing in Duopoly Equilibrium: The Early US Cellular Telephone Industry

Abstract

This Paper estimates an equilibrium oligopoly model of horizontal product differentiation where firms compete in non-linear tariffs. The estimation explicitly incorporates the information contained in the shape of the tariffs offered by competing duopolists to recover the structural parameters associated to the distribution of consumers’ unobserved heterogeneity. The model identifies the determinants of the non-uniform equilibrium markups charged to consumers who make different usage of cellular telephone services. Estimates are then used to evaluate the welfare effects of competition, a reduction of the delay in awarding the second cellular license, and alternative linear and non-linear pricing strategies. Our policy evaluations reveal that a single two-part tariff achieves 63% of the potential welfare gains and 94% of the profits of a more complex fully nonlinear tariff.

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