Market Entry and Fighting Brand in the French MobileTelecommunications Market
Marc Bourreau Yutec Sun Frank Verboven
July 2, 2017
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Research questions
Mobile telecommunication currently characterized by consolidation wave
But this was preceded by new market entry in various countries• France 2010: Free mobile obtains the fourth license for 3G (and later 4G)
spectrum
Our analysis• How did the three incumbents respond to new market entry?• What was the direct and indirect impact of entry on consumers and welfare?
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Entry of Free mobile in France
Mobile market in France in 2011 Q4:• Three incumbent network operators: Orange, SFR & Bouygues Telecom• Highly concentrated: top 3 operators hold 87% market share• No new entry since Bouygues Telecom in 1996
Entry of Free Mobile• Obtained a 3G license in 2009• Entered in January 2012 with low cost voice/large data plan
Incumbents’ reaction: each launched its own low-cost product line:• Orange → Sosh• SFR → Red• Bouygues→ B&You
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Impact of entry on prices
05
1015
2025
30Pr
ice
2011q1 2012q1 2013q1 2014q1 2015q1Quarter
Orange Sosh SFR Red Bouygues B&You Free
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Impact of entry on market shares
0.1
.2.3
.4Sh
are
2011q1 2012q1 2013q1 2014q1 2015q1Quarter
Orange Sosh SFR Red Bouygues B&You Free
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Fighting brands
Definition• Incumbent’s subsidiary brands targeting the segment entered by low-priced
competitor• Introduced as the incumbent’s strategic response to entry (Johnson & Myatt, 2003)• Distinguished from price discrimination• Intel’s Celeron to fight AMD• Lufthansa’s Germanwings against easyJet & Ryanair
Distinguishing marks of fighting brands• Large scale entry with low-end products• Positioning of fighting brand comparable to entrant’s quality• Without entry, the low quality not supplied by incumbents due to cannibalization
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Free mobile’s entry: a fighting brand story?
Free mobile’s entry in 2012• Low prices: unlimited SMS for AC2, unlimited calls & data for AC20• Large scale entry: national coverage with established brand
Incumbents’ reaction• Simultaneously introduced subsidiary brands right before entry• Imitate the price & quality of Free mobile• Under brands sufficiently differentiated from the existing premium products
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Research objectives
1. Empirically test the theory of fighting brand in mobile telecom industry• Strategic incentives of the subsidiary brands• Incentives noncooperative or collective?
2. Measure welfare impacts of entry by sources• New product/variety effect: has Free as a low cost operator created large
consumer welfare gains?• Traditional competition effect: did entry reduce the incumbents’ prices?• Indirect competition effect: did entry lead to fighting brand strategy by
incumbents?
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Literature
1. Fighting brands• Under monopolist incumbent (Johnson & Myatt, 2003)
2. Competition & product variety• Strategic product positioning to deter entry (Berry & Waldfogel, 2001)
3. Impact of market structure in telecom market• Only variety effect on consumer welfare (Economides, Seim & Viard, 2008)• On price & investment (Genakos, Valletti & Verboven, 2017)
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Data overview
Demand & product characteristics• Sampling during 2011Q1–2014Q4 across 13 regions in France• Subscriber shares by mobile operator’s brand• Average prices & service attributes (allowances...)• Demographics
Network characteristics• Mobile cellular antennas as a measure of network quality• Database of active antenna sites provided by ANFR• Technology generation, location & activation date
Other data• Population by region from INSEE• MVNO partnerships with MNOs from press reports
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Mobile services
Network Product Antenna Antenna Antenna Price Subscriberoperator line 2G 3G 4G (AC) share
Orange Orange 2,009 1,370 213 24.98 0.314Sosh 16.66 0.029MVNO 0 0 0 16.21 0.046
SFR SFR 1,438 1,211 76 20.99 0.231Red 15.52 0.020MVNO 0 0 0 14.97 0.073
Bouygues Bouygues 1,450 1,093 194 23.39 0.146B&You 16.07 0.023MVNO 0 0 0 23.19 0.016
Free Free 0 385 50 11.54 0.136
Total 1,718 samples across 12 regions for 2011 Q1–2014 Q4
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Local demand for mobile service
Consumer i’s utility from brand j at market t:
uijt =
{αipjt + γi log ajt + βixjt + ξjt + εijt j = 1, ..., J,εi0t j = 0.
• pjt: total package price (subscription & usage)• ajt: network antennas (2G, 3G & 4G)• xjt: roaming antennas, allowances, operator FEs, time trend, demographics, etc.• ξjt: unobserved mean quality
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Wholesale & retail profits
Total profit of MNO f ∈ F :
Πf =∑l∈Lf
(pl − cl)sl (p)M + (wf0 − cf0 )sf0 (p)M,
and total profit of affiliated MVNO f0:
Πf0 = (pf0 − wf0 )sf0 (p)M.
Two-stage pricing game
1. MNOs set the wholesale price for their affiliated MVNOs.
2. MNOs & MVNOs set retail price.
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Wholesale & retail pricing
2nd stage FOC:
∂Πf
∂pj= sj +
∑l∈Lf
(pl − cl)∂sl
∂pj+ (wf0 − cf0 )
∂sf0∂pj
= 0 j ∈ Lf , f ∈ F,
∂Πf0∂pf0
= sf0 + (pf0 − wf0 )∂sf0∂pf0
= 0 f ∈ F.
1st stage FOC:
dΠf
dwf0=
∂Πf
∂wf0+∑j∈J
∂Πf
∂pj
∂pj
∂wf0
= sf0 +∑
j∈J\Lf
∑l∈Lf
(pl − cl)∂sl
∂pj+(wf0 − cf0
) ∂sf0∂pj
∂pj
∂wf0= 0.
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Estimation method
Demand estimation• Two-step optimal GMM estimator robust to serial correlation• BLP instruments for price: sum of network characteristics of other products within
the same firm• Network investments exogenously given
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Demand for networkEstimate Logit IV logit RC logit
σγ 0.66***(0.24)
Price/income 0.05*** -0.28*** -0.35***(0.01) (0.07) (0.08)
Log(2G antenna) 1.20*** 2.39*** 1.50***(0.22) (0.45) (0.54)
Log(3G antenna) -0.11 -0.02 0.28(0.10) (0.18) (0.31)
log(4G antenna) 0.06 0.48*** 1.50***(0.04) (0.08) (0.51)
Log(3G roaming) -0.24** -0.10 0.33(0.11) (0.20) (0.34)
Log(4G roaming) 0.03 -0.06 0.73*(0.05) (0.13) (0.44)
1/Time since entry -5.37*** -0.21 -6.74***(0.23) (0.57) (0.55)
Age of population -0.07** -10.19*(0.03) (5.47)
Log(income) -5.93*** -9.05(0.46) (10.89)
Observations 1,595 1,595 1,595J test (p value) 0.01 0.27Market fixed effects Yes Yes YesDemographics No No Yes
Standard errors in parentheses: p¡0.10, ** p¡0.05, *** p¡0.01Random coef. for total 3G&4G antennas
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Network brand fixed effects
Estimate Logit IV logit RC logit
Orange 2.32*** 2.68*** -0.26(0.21) (0.41) (3.41)
SFR 2.63*** 2.23*** -0.68(0.20) (0.33) (2.81)
Bouygues 1.97*** 2.21*** -2.93(0.19) (0.33) (2.99)
Free 3.63*** 0.02 -3.14(0.20) (0.94) (3.86)
Sosh 1.18*** -0.73 -1.60(0.22) (0.53) (3.43)
B&You 1.41*** -0.30 -3.78(0.21) (0.50) (3.82)
Red 1.29*** -0.35 -8.21***(0.21) (0.52) (2.97)
Observations 1,595 1,595 1,595J test (p value) 0.01 0.27Market fixed effects Yes Yes YesDemographics No No Yes
Standard errors in parentheses: p¡0.10, ** p¡0.05, *** p¡0.01Demographics include age and income interacted with each product.Time trend and intercept are included in all specifications.
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Retail margins of MNOs
Network Product Retail Retail Own priceoperator line price markup elasticity
Orange Orange 24.98 4.32 -5.91Sosh 16.66 4.16 -5.40
SFR SFR 20.99 4.09 -6.79Red 15.52 4.11 -3.18
Bouygues Bouygues 23.39 3.20 -5.50B&You 16.07 3.24 -5.27
Free Free 11.54 3.27 -5.22
The estimates are in euros.
The last column reports the elasticities of the retail demand.
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Wholesale & retail margins of MVNOs and hosts
Retail Wholesale(lessee network) (host network)
MVNO groups Price Markup Price Markup
Orange 16.21 2.66 13.56 5.28SFR 14.97 2.74 12.23 5.03Bouygues 23.19 2.59 20.45 3.78
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Unilateral incentives for fighting brand
Free mobileNo enter Enter
Orange AC223 million AC185 millionSFR AC158 million AC130 millionBouygues AC219 million AC168 million
Incentives for unilateral deviation from the Nash equilibrium,aggregated across all 20 regions during 2011-2014.
Unilateral introduction of FB raises variable profits by more in the absence of entry thanin the presence of entry.
⇒ No increased unilateral profit incentives for FB after entry
⇒ No level of fixed costs can rationalize why FBs were introduced after entry
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Joint incentives for fighting brand
Free mobileNetwork No enter Enter
Orange -70 million 19 millionSFR -143 million -50 millionBouygues 97 million 105 million
Total incumbents -116 million 74 million
Profit changes during 2011–2014 in euros
Joint introduction of FB raises variable profits by more in the presence than in theabsence of entry.
⇒ Increased joint profit incentives for FB after entry
⇒ Fixed costs can rationalize why FB introduced after but not before entry.
⇒ Semi-conclusion: incumbents do not invest in low-cost brands, until entry of Freeforces them to do so
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Sources of surplus gains
Source Entry +Price +Fight Totalonly response brands effect
Consumer 3,401 996 764 5,161Producer -370 -826 -212 -1,408Total 3,031 170 552 3,753
Changes in surplus generated by the counterfactual actions labeled in thecolumn. It is measured by subtracting the counterfactual surplus from thevalue in the observed market. The figures are measured in million euros forall 20 regions during 2011-2014.
• Most of consumer gains due to variety effect• Additional consumer gains from incumbent’s prices and FB response• Total welfare gains from variety and FB effects
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
Conclusions
Fighting brands• More evidence for partial coordination
Welfare gains from entry• Mainly from new product/variety of cost efficient entrant• Additional gains from traditional price competition effect• Extra indirect gains from fighting brands
Future research• Study how entry affects investment
Market Entry and Fighting Brand in the French Mobile Telecommunications Market Bourreau, Sun, and Verboven
