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The authors study the effect of entry on costs and competition in the Portuguese mobile telephony industry. They construct and estimate a model that includes demand, network, and cost equations. The latter accounts for inefficiency and cost reducing effort. Their results suggest that the entry of a third operator in 1998 lead to significant cost reductions, and fostered competition. They also show that failure to account for cost reducing effort leads to biased estimates of competition in the industry. Finally, they also find that their estimated price-cost margins are similar to hypothetical Nash margins, if firms are patient, and have optimistic beliefs about the industry growth.
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