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Rafael López, Teodosio Pérez-Amaral, Teresa Garín-Muñoz and Covadonga Gijón

From an economic perspective, the ultimate goal of a market is twofold: to provide consumers with a wide range of available options and to allow consumers to freely choose among them based on information. The first part is obtained by promoting competition while the second part is ensured through consumer protection. Regulators of mobile telecommunications markets have been particularly successful in promoting and securing competition and are now turning their attention to consumer protection. This is so because competition by itself does not ensure market efficiency. In fact, the existence of demand-side market failures, such as incomplete information and consumers' behavioural biases, usually lead to an inefficient outcome in competitive markets. In this paper we focus on the particular issue of low-quality customer service that, according to widespread evidence, prevails in the mobile telecommunications industry. We provide theoretical support to this empirical observation by using simple game theoretical models where inefficient low-quality customer service levels are obtained as part of an equilibrium strategy profile for the firms. In our models, this negative result is due to the existence of incomplete information: when signing a mobile phone contract, consumers cannot observe (ex ante) the operator's customer service quality and therefore firms may lack incentives to provide (ex post) high quality customer service levels. As a benchmark, we start by studying the simple case of a one-shot monopoly market and show that incomplete information leads to an inefficient outcome. We then show that the negative result continues to hold under repeated interaction and that it does not necessarily vanish with competition. This is particularly important in terms of policy implications because it suggests that the inefficiency should be solved through regulation via consumer protection.