Multimarket contact and strategic entry decisions

Abstract

This work examines the relationship between multimarket contact (MMC) and entry in the US broadband service industry. I examine unique data on entry into ADSL broadband over the years 2005-2008 in the USA. Results indicate that MMC increases the probability of entry into local broadband markets by incumbent local telephone companies, which is consistent with the firms' expectations that competition will be softer in such markets. Thus, the evidence is consistent with the notion that MMC facilitates mutual forbearance. A deeper investigation uncovers evidence consistent with firms using MMC to help build 'spheres of influence' to limit competition. Evidence for using MMC to 'transfer power' (shifting slackness in the incentive constraint to other markets) is weaker and contradictory. This result indicates that heterogeneity among firms within markets may be a more important driver of competition (or its lack) than heterogeneity among markets.