Review of Industrial Organization 22: 47–65, 2003.
© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
Is Mobile Telephony a Natural Oligopoly?
TOMMASO M. VALLETTI
Imperial College London and CEPR
Abstract. This paper presents a model of competitive interaction among mobile telecommunications
operators. Operators can offer services in two separate markets, urban and rural areas, and customers
commute between them. Market coverage of an operator can then be interpreted as a parameter of
vertical product differentiation. The main implication is that the industry has strong features of a
“natural oligopoly”: Only a limited number of operators with possibly different coverage can survive
in equilibrium. It is also shown that competing operators do not have an incentive to reach roaming
agreements over non-overlapping areas. On the contrary, roaming can be easily agreed upon by
Key words: Coverage, mobile communications, roaming.
Mobile phones are the biggest growth area in the telecommunications industry and
in many countries, both developed and developing, the number of mobile phone
subscribers has already exceeded the number of ﬁxed lines. To give an idea of the
size of the business, at the start of 2000 there were half a billion mobile users in
the world, moreover the top ten operators collected on average, in 1998, more than
$600 per subscriber (ITU, 1999). The recent auctions conducted by the Federal
Communications Commission in the US conﬁrmed that the industry is expected to
continue to generate considerable interest in the future (Cramton, 1997). The same
expectation is true also in Europe as far as the new generation of mobile commu-
nications (UMTS) is concerned. Most of the recent debate has been focused on
the optimal way of assigning a certain number of new licenses (Klemperer, 2002)
and it is, therefore, quite striking to ﬁnd very limited literature on the economic
characteristics of the mobile industry.
Given that the number of operators has
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Notable exceptions include empirical works by Parker and Röller (1997) and Busse (2000)
who estimate a structural model of collusion in U.S. markets during the early period of monopolies
and duopolies in the U.S., Hausman (1997) who provides welfare estimates associated to the mobile
services in the U.S., Gruber and Verboven (2001a) who study a diffusion process of mobile telephony
in the European Union, and Gruber and Verboven (2001b) who analyze the impact that competition,
pre-emption behavior by incumbents, and technological standards had on mobile diffusion. Recent
surveys of this literature are provided by Hausman (2002) and Gruber and Valletti (2003).