Market Entry and Fighting Brand in the French Mobile Telecommunications 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 • 2010: Free mobile obtains the fourth license for (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 & • 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 30 25 20 15 Price 10 5 0 2011q1 2012q1 2013q1 2014q1 2015q1 Quarter

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 .4 .3 .2 Share .1 0 2011q1 2012q1 2013q1 2014q1 2015q1 Quarter

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 Subscriber operator line 2G 3G 4G (AC) share Orange Orange 2,009 1,370 213 24.98 0.314 Sosh 16.66 0.029 MVNO 0 0 0 16.21 0.046 SFR SFR 1,438 1,211 76 20.99 0.231 Red 15.52 0.020 MVNO 0 0 0 14.97 0.073 Bouygues Bouygues 1,450 1,093 194 23.39 0.146 B&You 16.07 0.023 MVNO 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:  αipjt + γi log ajt + βixjt + ξjt + ijt j = 1, ..., J, uijt = i0t 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 : X Πf = (pl − cl)sl (p) M + (wf0 − cf0 )sf0 (p) M, l∈Lf

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 X ∂sl ∂sf0 = sj + (pl − cl) + (wf0 − cf0 ) = 0 j ∈ Lf , f ∈ F, ∂pj ∂pj ∂pj l∈Lf

∂Πf0 ∂sf0 = sf0 + (pf0 − wf0 ) = 0 f ∈ F. ∂pf0 ∂pf0 1st stage FOC:

dΠf ∂Πf X ∂Πf ∂pj = + dw ∂w ∂p ∂w f0 f0 j∈J j f0   X X ∂sl  ∂sf0 ∂pj = sf0 +  (pl − cl) + wf0 − cf0  = 0. ∂pj ∂pj ∂wf0 j∈J\Lf l∈Lf

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 network

Estimate 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 1,595 J test (p value) 0.01 0.27 Market fixed effects Yes Yes Yes Demographics No No Yes

Standard errors in parentheses: p¡0.10, ** p¡0.05, *** p¡0.01 Random 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 1,595 J test (p value) 0.01 0.27 Market fixed effects Yes Yes Yes Demographics No No Yes

Standard errors in parentheses: p¡0.10, ** p¡0.05, *** p¡0.01 Demographics 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 price operator line price markup elasticity Orange Orange 24.98 4.32 -5.91 Sosh 16.66 4.16 -5.40 SFR SFR 20.99 4.09 -6.79 Red 15.52 4.11 -3.18 Bouygues Bouygues 23.39 3.20 -5.50 B&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 5.28 SFR 14.97 2.74 12.23 5.03 Bouygues 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 mobile No enter Enter Orange AC223 million AC185 million SFR AC158 million AC130 million Bouygues 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 than in 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 mobile Network No enter Enter Orange -70 million 19 million SFR -143 million -50 million Bouygues 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 the absence 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 Free forces 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 Total only response brands effect Consumer 3,401 996 764 5,161 Producer -370 -826 -212 -1,408 Total 3,031 170 552 3,753

Changes in surplus generated by the counterfactual actions labeled in the column. It is measured by subtracting the counterfactual surplus from the value in the observed market. The figures are measured in million euros for all 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