CRTP-7

"Competitive Strategy and Shakeouts in Telecommunications"

Daniel F. Spulber
February 1995

This paper considers the potential for large scale shakeouts in the telecommnications 
industry and presents a theoretical model that provides insights into how shakeouts 
can occur. In the model, firsm enter the market, make irreversible investments and 
engage in price competition. Asymmetric information about technology leads to 
overexpansion of industry capacity followed by a shakeout. The paper examines 
two-stage and three-stage versions of the model. In the two-stage case, an entry 
stage is followed by a price-setting stage, while in the three-stage setting, firms 
can make cost-reducing investments after entry. Price competition results in a shakeout 
with the lowest-cost firm capturing the higest market share and number of customers.