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13.4 OLIGOPOLY WITH HORIZONTALLY DIFFERENTIATED PRODUCTS 557

information from ET’s 1987 prospectus (a document ET’s freight shuttle service would be substantially less
prepared for investors and lenders discussing its plan for than the marginal cost of freight shuttle service by ferry.
doing business) and some educated back-of-the- KMS’s analysis suggested that ET would become
envelope conjectures, KMS estimated price reaction a formidable competitor in the cross-channel freight
functions for both ET and the ferry operators, as shown market. Two years after the opening of the Chunnel,
in Figure 13.12. The Bertrand equilibrium that they pre- ET was capturing 44 percent of the cross-channel
dicted occurred at a price of £87 for the tunnel and truck traffic versus 40 percent for the ferries. By 2002,
£150 for the ferry operators. The large difference be- ET’s share of the cross-channel truck market had
tween ET’s equilibrium price and the ferries’ equilibrium grown to over 50 percent, and the truck shuttle service
price reflect KMS’s estimate that the marginal cost of was probably ET’s most profitable business.

£160
Ferry reaction function

£120
Tunnel reaction function
Tunnel price (£) £80 FIGURE 13.12 Bertrand

Equilibrium: The Chunnel and
the Ferries

£40 The curves are the reaction functions for
the Channel Tunnel and the ferries. The
Bertrand equilibrium occurs at a price of
£87 for the Chunnel and £150 for the
ferries.
£0
Source: Figure 18.7 from “Pricing the
£125 £150 £175 £200 £225 £250 Tunnel,” in J. Kay, The Business of
Ferry price (£) Economics (New York: Oxford University
Press), 1996.

APPLICA TION 13.6

Wireless Number Portability
number, and you might miss important phone calls
while they were learning your new number.
November 24, 2003 was an important day for the U.S. By turning consumers who would otherwise have
wireless telephone industry. Beginning then, sub- been shoppers into “loyalists,” wireless number non-
scribers were allowed to keep their phone numbers portability had the effect of strengthening the hori-
when switching from one wireless provider to an- zontal product differentiation between providers.
other. In other words, if you switched your cellular Since wireless phone service is essentially the same
phone service from, say, Verizon to Cingular, your product no matter who delivers it, any significant
phone number would remain the same. Prior to wire- horizontal differentiation went away on November
less number portability, the need to change your 24, 2003. Economic theory predicts that the onset of
phone number if you changed wireless providers portability would move the industry from an equilib-
created a potentially significant switching cost for con- rium in which the percentage contribution margins
sumers. You would need to inform your co-workers, are moderate to large, to one in which price is much
friends, and family members of your new phone closer to marginal cost, perhaps even approaching