The Effects of Informal Markets on Competition: Evidence of Paid TV in Peru

Posted by Social Science Research Network

The Effects of Informal Markets on Competition: Evidence of Paid TV in Peru

Arturo Briceño & Christian Rojas (University of Massachusetts)

Abstract:      Numerous competition studies have dealt with antitrust issues such as market definition, market power and diversion ratios in markets where all firms operate legally (i.e. are tax-abiding entities, paid for inputs they used in their production process and/or have paid the proper government licenses to do so). We investigate these competition issues in a market characterized by the presence of a significantly large number of “informal” firms (illegal providers of subscription TV in Peru) and informal users (illegal users). It is suspected that more than 50% of paid TV subscribers use informal firms as their supplier. We make use of a representative household survey administered by the Peruvian telecom regulator in which households provided crucial information regarding the “(il)legality” of their paid TV supplier. We use quantitative antitrust tools (demand estimation) to quantify the impact that the presence of the informal sector has on competition. In particular, we are able to show that, after controlling for all product characteristics that drive demand (as well as endogeneity), not accounting for the presence of the informal sector would lead antitrustauthorities to erroneous conclusions regarding market power within the relevant antitrust market. This is particularly important in a country where the leading paid TV operator would be catalogued as “dominant” as its market share would surpass 60% absent illegal providers. We provide evidence of how the presence of illegal operators constrain the pricing power of the legal providers.

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