The Impact of Entry on Prices and Costs

Abstract

In this article, we propose a very simple methodology to evaluate the impact on prices and costs of the entry of a firm in a market, and apply it to the entry of a third firm in the Portuguese mobile telephony industry. Using quarterly firm level data, we characterize the evolution of the firms' prices and costs. We argue that the more plausible explanation for the behavior of these variables is the competition hypothesis. The entry of the third firm forced the other two firms to reduce their prices. The decrease in their profit margins led the two firms to improve their internal efficiency. As a consequence, their costs fell.