Posted by Social Science Research Network
By Christian Rojas (University of Massachusetts) & Arturo Briceño
Abstract: Competition studies that focus on antitrust issues (e.g. market definition, market power) are typically conducted in markets where all firms are assumed to operate legally (competitors are tax-abiding entities, pay for all inputs used in their production process, have paid the proper government licenses to do so, etc.). We investigate competition issues in a market characterized by widespread piracy: subscription TV in Perú. Estimates suggest that 50% of subscription TV users in Perú (30% in Latin America) use an illegal provider. We make use of a unique dataset in which households provided crucial information regarding the (il)legality of their paid TV supplier. Using quantitative antitrust tools based on demand estimation techniques we study the impact that the presence of the informal sector has on competition. Our estimates suggest that the illegal operators constitute a close substitute for (and henceforth significantly constraint the pricing power of) legal operators. This finding can have important antitrust implications: the failure to account for piracy could lead to erroneous conclusions regarding market power measurement and the delineation of the relevant (antitrust) market. This may be particularly important in several industries (especially in the developing world) where the leading operator may be cataloged as “dominant” only in the absence of illegal providers.