Dynamic Entry and Investment in New Infrastructures: Empirical Evidence from the Fixed Broadband Industry

In the telecommunications industry, the ladder-of-investment approach claims that service-based competition (when entrants lease access to incumbents’ facilities) can serve as a “stepping stone” for facility-based entry (when entrants build their own infrastructures to provide services). In this paper, we build an empirical model that encompasses a complete ladder-of-investment, composed of three rungs: bitstream access, local loop unbundling and new access facilities. Using data from the European Commission’s “Broadband access in the EU” reports covering 15 European member states for 17 semesters, we test the ladder-of-investment hypothesis. We find no empirical support for this hypothesis, that is, for the transition from local loop unbundling to new access infrastructures, and weak empirical support for the transition from bitstream access lines to local loop unbundling. These results are robust when we take into account the migration effect, the number of access rungs, the development of broadband cable, the regulatory performance, and the evolution of local loop unbundling prices.     

Infrastructure investment and optimal access regulation in the different stages of telecommunications market liberalization

In this paper, we compare the optimal access regulation under three different market configurations that approximate the different stages of telecommunications market liberalization. We show that in the first stage of market liberalization the regulator has to balance between static efficiency and investment and that the optimal access price may be above marginal cost. In the second stage, two different outcomes are possible. If entrants tend to underinvest, the regulator balances between static efficiency and investment. If entrants tend to overinvest, the regulator sets the access price as low as possible in order to prevent or limit infrastructure duplication. Interestingly, we find that in the third stage of market liberalization the regulator may decide to promote infrastructure duplication and to set the access price above the price in the first stage of market liberalization, even if telecommunications network operators tend to overinvest in infrastructure duplication.     

Access Pricing in the Postal Sector: Theory and Simulations

This paper studies a theoretical model aimed at assessing the optimal access charges and retail prices in the postal sector. It takes explicitly into account three main characteristics of the postal sector: the ability of entrants to bypass the incumbent’s delivery network; the imposition on the incumbent, but not on entrants of universal service obligations; and the provision of access to both competitors and customers. The paper first develops analytical formulations of the optimal access charges and the incumbent’s end-to-end retail price. It then presents calibrated results illustrating the impact on prices and welfare of various scenarios.     

The impact of different fibre access network technologies on cost,competition and welfare

Using a novel approach to the evaluation of new network technologies that combines an engineering cost model with a differentiated multi-player oligopoly model with wholesale access regulation this article evaluates the choice among different Fibre-to-the-Home (FTTH) architectures. The cost modelling relies upon an engineering bottom-up approach that feeds into a competition model. For addressing competition the pyramid model was chosen, which is an extension of the Hotelling model to multiple firms/services. The paper solves for price setting Nash equilibria between an incumbent, wholesale-access-based entrants and cable as an additional fully integrated network competitor. Welfare tradeoffs are highlighted with respect to cost differences and QoS differences between the various FTTH architectures and between the modes of regulation. According to the analysis architectures that can be unbundled (and that allow for greater speeds) outperform, from a social welfare perspective, architectures that (realistically) allow only for bitstream access.     

Mental Models and Successful First‐mover Entry Decisions: Empirical Evidence from Chinese Entrepreneurs

Existing research has identified a variety of mechanisms through which early entrants may be able to develop competitive advantages that favorably influence performance relative to later entrants. At the same time, later entrants can sometimes enjoy cost advantages arising from free riding and the resolution of uncertainty. Despite the impressive array of possible explanations linking entry timing with performance, it is unclear how these explanations align with the cognitive representations that guide managerial decision making. The authors address this gap in the literature by arguing that the resource‐based view of the firm provides potential insight into the way that perceived pioneer advantages and disadvantages influence managerial behavior. The resource‐based view argues that the value of various pioneer advantages will depend on the degree to which those advantages enable pioneers to access and control resources that are costly to copy. Because legal and cultural variables also influence access to resources, the value of specific dimensions of pioneer advantage will vary depending on the macroenvironment within which a firm operates. To test this reasoning, the authors examine the impact of perceived pioneer advantages on the number of first‐mover entry decisions of Chinese service entrepreneurs, who operate in an environment characterized by underdeveloped legal institutions and inadequate legal protections, a fledgling capital market, the limited availability of information about products and industries, and an emphasis on personal connections. The authors hypothesize that these unique characteristics of Chinese markets will affect the perceived importance of sources of pioneer advantage identified in studies of Western (primarily United States) firms. Using data collected from 302 Chinese service entrepreneurs, the authors find strong evidence that the number of pioneer entry decisions made by Chinese entrepreneurs are strongly tied to entrepreneurs’ perceptions that pioneer firms tend to outperform later entrants and have the ability to preempt key assets. In addition, the number of entry decisions is negatively related to perceptions of pioneer cost disadvantages and the level of uncertainty faced by pioneers relative to later entrants. However, consistent with the research hypotheses, perceptions of pioneer leadership and cost advantages do not significantly influence the entry decisions of Chinese service entrepreneurs.     

An Empirical Analysis of Entrant and Incumbent Bidding in Road Construction Auctions

This paper explores differences in the bidding patterns of entrants and incumbents in road construction auctions. We find that entrants bid more aggressively and win auctions with significantly lower bids than incumbents. The differences in their bidding patterns are consistent with a model of auctions in which the distribution of an entrant's costs exhibits greater dispersion than that of an incumbent's and relations of stochastic dominance in the distributions do not persist for the entire range of estimated costs. We also find that more efficient firms bid, on average, more aggressively and firms with greater backlogs bid less aggressively.     

How does institutional change affect heterogeneity among firms?

This paper examines the variation in performance of incumbents and entrants following the deregulation of prices and entry in the airline industry. Our approach is similar to earlier studies of interfirm performance heterogeneity across industries. Drawing on theories of industry evolution, we hypothesize that the performance of entrants will have higher variance than incumbents. Further, given the opportunities offered by price deregulation, we propose that incumbents will have higher variance in performance under deregulation than in the earlier regime. The findings indicate that entrant performance heterogeneity is significantly greater than incumbent performance heterogeneity following deregulation, but that the variation in performance among incumbents does not significantly change when deregulation occurs. The second result is surprising given the range of service and process innovations that incumbents initiated. These results suggest that the distinction between entrants and incumbents is critical to future studies of performance variation within and across industries. Copyright © 2002 John Wiley & Sons, Ltd.     

Location strategies for agglomeration economies

Because agglomeration economies may create competitive advantage and each location has a unique array of agglomeration economies, where should firms locate? We combine fundamental economic and strategy concepts to: (1) determine when firms must locate proximately to access factor pools; (2) show that factor pools controlled by fewer firms are less useful to new entrants; and (3) demonstrate that certain firms risk aiding competitors when contributing to efficient factor pools. We find support for our predictions with a test on new U.S. manufacturing entrants from 1985 to 1994, using an empirical specification that separates agglomeration levels from agglomeration economies. Copyright © 2013 John Wiley & Sons, Ltd.     

Doomed from the start: what is the value of selecting a future dominant design?

This study investigates how important it is for a firm to select what turns out to be a dominant design in a technology‐driven industry. Using the personal computer industry as a case study, this research shows that firms are not doomed when their entry design choices turn out to be ‘wrong.’ For early entrants, we found that switching to the dominant design is associated with increased chances of survival and market share. Contrary to our expectations, we found that even later entrants that switched to the dominant design also enjoyed higher survival rates and greater market position. Copyright © 1999 John Wiley & Sons, Ltd.     

Global marketing effectiveness via alliances and electronic commerce in business-to-business markets

Numerous changes in the global business climate have intensified global competition through new forms of competition as well as the addition of new competitors. As a result, domestic and international firms have to develop and implement marketing strategies that are aligned with the current global competitive realities. This study explores the influence of three overarching developments that stand out as having a dominating role in the shifting international competitive landscape: (1) the rapid growth of global business activities by existing firms and new entrants, for example, through increased international outsourcing (i.e., the intensification of importing activities); (2) the transition to managing supply chain systems through greater coordination of entire distribution channels, alliances, and relational exchanges; and (3) the emergence and increased strategic deployment of electronic forms of exchange, particularly with respect to information access, storage, and retrieval, as means of more efficient management of domestic and global network of operations and market intelligence. Managerial and research implications of these trends are discussed.     

Product line strategies of new entrants in an established industry: evidence from the U.S. bicycle industry

A firm's product line breadth in a given market has both benefits and costs; these effects can be more clearly seen by examining not only the number of products a firm offers, but also the degree of complexity that the product line represents. The effects of breadth are particularly important for new entrants in a relatively mature industry and I examine the breadth–survival relation on new entrants in the bicycle industry in the period 1993–98. I find that firms offering a greater number of products, those with very simple and very complex product lines, and those whose product lines have a moderate degree of overlap with rivals have the highest survival rates. Copyright © 2006 John Wiley & Sons, Ltd.     

All-Unit Discounts and the Problem of Surplus Division

All-unit discounts (AUD) are non-linear pricing schemes whereby buyers who reach a specific quantity threshold get rebates also retroactively for all units bought before. This sets high incentives for buyers to meet the quantity threshold, and may also have foreclosure effects on potential entrants. In a model where an incumbent faces second-period competition by entrants, we show that AUD can indeed be abused to shift rents from entrants. In contrast to exclusive dealing which is usually seen as very similar to AUD, inefficient quantity distortions may arise even with perfect information if and only if there is sufficiently intense competition among potential entrants.     

Liberalizing US spectrum allocation

In the US, adjudication of wireless entry under the “public interest” standard protects incumbent service providers. Excess demand exists for access to radio spectrum, despite a common misperception that license auctions held by regulators are tantamount to selling spectrum. Would-be suppliers are slowed by the regulatory process. After discussing the financial tolls extracted, the author suggests a number of structural policy reforms, applicable both to the USA and perhaps spectrum markets elsewhere. These include: permissive airwave use (within emission limits implicitly defined by the license); endowing licensees with use of adjacent buffer zones; exhaustive allocation of remaining bandwidth to new applicants and streamlining the process for entrants to gain access to unoccupied bandwidth, using liability rules and post-entry dispute resolution mechanisms.     

Are market pioneers intrinsically stronger than later entrants?

Are market pioneers more successful because they started with superior skills and resources? The absolute pioneer advantage hypothesis is that because market pioneering is desirable, firms with superior skills and resources naturally choose to pioneer new markets. The comparative advantage hypothesis is that market evolution changes success requirements. Market pioneer skills and resources differ from, but are not superior to later entrants. Empirical results across 171 diversification entrants tend to support the comparative advantage hypothesis. Skill and resource profiles are provided for market pioneers, early followers, and late entrants.     

The Role of Incentives for Opening Monopoly Markets: Comparing GTE and BOC Cooperation with Local Entrants

While the 1996 Telecommunications Act requires all incumbent local telephone companies to cooperate with local entrants, section 271 of the Act provides the Bell companies but not GTE additional incentives to cooperate. Using an original data set, I compare the negotiations of AT&T, as a local entrant, with GTE and with the Bell companies in states where both operate. My results suggest that the differential incentives matter: The Bells accommodate entry more than does GTE, as evidenced in quicker agreements, less litigation, and more favorable prices offered for network access. Consistent with this, there is more entry into Bell territories.     

A critical review of the “ladder of investment” approach

The “ladder of investment” is a regulatory approach proposed by Cave (2006), which has been widely embraced by national regulatory authorities in the European telecommunications sector. The approach entails providing entrants, successively, with different levels of access—the “rungs” of the investment ladder, while inducing them to climb the ladder by setting an access charge that increases over time or by withdrawing access obligations after some pre-determined date (i.e., by setting sunset clauses). Proponents of the ladder of investment approach claim that such regulatory measures would make service-based entry and facility-based entry complements—albeit they have been traditionally viewed as substitutes—in promoting competition. The regulators, thus, have shown a strong interest in this approach. The paper provides a critical review of the ladder of investment approach by setting out its two underlying assumptions and discussing their validity with references to the related industrial organization literature.     

Good intentions,poor outcomes: Telecommunications reform in South Africa

As the first decade of democratic rule draws to a close in South Africa, this paper reviews the telecommunications reform process in terms of the performance of the sector against the twin national policy objectives of affordable access to communications services and accelerated development to meet the needs of a modern economy. It critiques the implementation of international reform models which have in practice tended to emphasise privatisation at the expense of other reform mechanisms—including competition and, in particular, regulatory measures. It argues that this has impacted negatively on affordable access and has inhibited market innovation.This paper identifies the root of the problem as the market structure. Designed around the vertically integrated incumbent operator, it induces inherently anti-competitive impertives that demands a resource-intensive regulatory response. The regulator has often not had the statutory powers, and seldom the capacity, to circumscribe the behaviour of the incumbent so that it does not impact negatively on new entrants. Without effective regulation, the assumed benefits of liberalisation—including more affordable access through improved management of the incumbent and more efficient allocation of resources in the market through competition—do not materialise.The paper argues that developing country telecommunications markets demand more from a regulator than simply meeting the threshold requirements of transparency and predictability via so-called international “best practice” models. Such a limited approach will not be sufficient to meet the challenges facing most developing countries. The highly imperfect nature of developing country markets, and the enormous income disparities and inequities that exist, require strategic regulation. This is necessary to enable innovative service provision, especially to under-serviced areas, and to facilitate fair competitive markets that promote the viability of the new entrants needed to build the information infrastructure—the infrastructure necessary for a country's participation in the global network economy.Simply removing all market-entry restrictions, however, is likely to place an even more onerous burden on already-struggling regulators and is unlikely to contribute to universal access and other developmental goals. A new policy approach involving the fundamental restructuring of the market is needed to remove the anti-competitive incentives that exist in the vertically integrated market structure that generally accompanies privatisation in developing countries. While a more horizontally structured market will not remove the incumbent advantage entirely, it is likely to reduce the need for constant adjustment of anti-competitive behaviour on the part of the incumbent, freeing up regulatory resources for more strategic regulation towards achieving national developmental objectives.     

Complementarities and competition: Unpacking the drivers of entrants' technology choices in the solar photovoltaic industry

Entrants in new industries pursue distinct technologies in hopes of winning the technology competition and achieving sustainable competitive advantage. We draw on the complementary assets framework to predict entrants' technology choices in an emerging industry. Evidence from the global solar photovoltaic industry supports our arguments that entrants are more likely to choose technologies with higher technical performance and for which key complementary assets are available in the ecosystem. However, diversifying entrants are more likely to trade off superior performance for complementary asset availability whereas start‐up entrants are more likely to trade off complementary asset availability for superior performance. This difference is largely due to diversifying entrants with pre‐entry capabilities related to the industry. The study offers a novel illustration of how complementarities and competition shape entry strategies. Copyright © 2013 John Wiley & Sons, Ltd.     

Third generation new entrants in the European mobile telecommunications industry

This paper focuses on new entrants within the European mobile telecommunications industry. More particularly, the paper identifies those new entrants that emerged from the third-generation (3G) licensing process across Europe before examining how they have fared. Four operators seeking to become new entrants across a range of countries are identified, although only one of them—Hutchison Whampoa trading as ‘3’—is considered to be fully active as a 3G new entrant. It is argued that the success of Hutchison Whampoa to date has been patchy, and that a supportive parent company has significantly contributed to its ability to remain active.     

Order of entry and performance in international markets

The inter-market and intra-market orders of entry and their performance consequences are examined for an industrial product. First entrants consist typically of both multinational and local firms, while early followers are multinational firms, and later entrants are smaller, local firms. A strong order of entry-market share relationship is observed in international markets. First entrants and later entrants outsurvive early followers. The analysis reveals a strategy for achieving both first-entry into many markets and dominance within those markets. Simultaneous entry into multiple markets occurs infrequently and in mature stages of the product life-cycle.