The Impact of Telecommunication Technologies on Competition in Services and Goods Markets: Empirical Evidence

AuthorVahagn Jerbashian,Anna Kochanova
DOIhttp://doi.org/10.1111/sjoe.12183
Date01 July 2017
Published date01 July 2017
Scand. J. of Economics 119(3), 628–655, 2017
DOI: 10.1111/sjoe.12183
The Impact of Telecommunication
Technologies on Competition in Services
and Goods Markets: Empirical Evidence
Vahagn Jerbashian
University of Barcelona, 08034 Barcelona, Spain
vahagn.jerbashian@ub.edu
Anna Kochanova
Max Planck Institute for Research on Collective Goods, DE-53113 Bonn, Germany
kochanova@coll.mpg.de
Abstract
In this paper, we empirically show that a more intensive use and wider adoption of telecom-
munication technologies significantly increases the level of product market competition in
services and goods markets. Our results are consistent with the view that the use of telecom-
munication technologies can lower the costs of entry and search. These findings are robust
to various measures of competition and a wide range of specification checks.
Keywords: Product market competition; telecommunication technologies
JEL classification:L16; O25; O33
I. Introduction
...[I]n most of the economy IT will help to increase competition.
Broadly speaking, the Internet reduces barriers to entry, because it is cheaper
to set up a business online than to open a traditional shop or office. The
Internet also makes it easier for consumers to compare prices. Both these
factors increase competition. (A Survey of the New Economy: Knowledge is
Power, The Economist, September 21, 2000)
We would like to thank two anonymous referees for valuable comments. Earlier drafts of
this paper have benefited from comments by Michał Grajek, Jan Hanousek, ˇ
Stˇ
ep´
an Jura-
jda, Lubom´
ır L´
ızal, Pedro Pereira, Montserrat Vilalta-Bufi, Evangelia Vourvachaki, Kreˇ
simir
ˇ
Zigi´
c, and the participants of various seminars. The authors gratefully acknowledge the
financial support of Charles University through grant 584612. V. Jerbashian gratefully ac-
knowledges the financial support of the Spanish Ministry of Education and Science through
grant ECO2012-34046 and the Generalitat of Catalonia through grant 2014SGR493.
Also affiliated with CERGE-EI, a joint workplace of Charles University in Prague and the
Economics Institute of the Czech Academy of Sciences, Prague, Czech Republic.
CThe editors of The Scandinavian Journal of Economics 2016.
V. Jerbashian and A. Kochanova 629
The Internet is a type of telecommunication technology. Conjectures
such as the above quote from The Economist indicate that there can be a
positive relationship between the more intensive use and the wider adoption
(hereafter, diffusion) of telecommunication technologies and competition in
services and goods markets (for similar conjectures, see Leff, 1984; Freund
and Weinhold, 2004; Czernich et al., 2011).
In this study, we empirically investigate the effect of the country-wide
diffusion of telecommunication technologies on the competition in services
and goods markets. In order to alleviate endogeneity concerns, we use
a difference-in-differences framework in the spirit of Rajan and Zingales
(1998). More specifically, we ask whether in countries with higher diffusion
of telecommunication technologies, the intensity of product market compe-
tition is different in the industries that depend more on these technologies
compared to the industries that depend less. We use input–output matrices
to measure the dependence on telecommunication technologies of indus-
tries. Our main measure of the diffusion of telecommunication technologies
is the number of fixed-line and mobile telephone subscribers per capita.
It captures the adoption and use of telecommunications in the economy
(e.g., R¨
oller and Waverman, 2001). In turn, the main measure of product
market competition is the price–cost margin (PCM). We use evidence from
21 European countries to establish our results.
Our results suggest that the diffusion of telecommunication technologies
has a strong positive effect on the intensity of competition in services and
goods markets. This finding is robust to various measures of competition,
dependence, and diffusion. It is also robust to a wide range of specification
checks and alternative identification assumptions, where we tackle further
the endogeneity concerns. It supports conjectures such as in the above
quote from The Economist.
To get a sense of the magnitude of the effect, consider the PCM dif-
ferential between industries at the 75th percentile (Real Estate Activities)
and at the 25th percentile (Manufacture of Other Transport Equipment)
of the distribution of dependence on telecommunication technologies. Our
estimates imply that this differential is higher by 0.02 in a country at the
25th percentile (such as Estonia) of the distribution of telecommunication-
technology diffusion than in a country at the 75th percentile (such as
France). This differential is economically sizable. For instance, it consti-
tutes the 11 percent of the sample mean of the PCM.
According to the standard theoretical inference, our results imply that
the diffusion of telecommunication technologies increases allocative effi-
ciency in the economy because it intensifies competition. Our results also
imply that, through the same channel, the diffusion of telecommunication
technologies can lead to productivity gains (Nickell, 1996; Syverson, 2004)
CThe editors of The Scandinavian Journal of Economics 2016.

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