Designing Markets

We contrast the public interest theory with the public choice theory as an explanation for entry regulation. These theories give sharply opposing predictions on how political rights affect the way markets are designed in mobile telephony, where governments have to decide the number of firms. The key to our approach is that in (analog) mobile telephony, the fundamental market failure is a negative crowding externality, not the monopoly welfare loss, and there is a single variable (the penetration ratio) that measures both the risk of market failure, and the level of rents. Our discrete time hazard estimations show that countries with better political rights (i) are more likely to allow entry of an additional telecommunications operator and (ii) decrease the hazard of entry less in response to an increase in the penetration ratio of mobile phones. These results support the public choice theory, but are inconsistent with the public interest theory. They hence warn that entry in mobile telecommunications may be guarded by a grabbing hand. JEL Classification: I110, L510, P480