To block or not to block:Network Competition when Skype enters the mobile market

Voice over Internet Protocol (VoIP) such as Skype that enables users to make free internet-based calls to other users has been seen as a threat to voice revenues by traditional network operators. While some mobile network operators (MNOs) attempt to block Skype's entry on their networks, some actually welcome it even if it apparently conflicts with their interests in making calling profits. In this paper we develop a Hotelling-style model of network competition between two MNOs to analyse their incentives to accommodate or block Skype. We find that accommodation is the dominant strategy of an MNO whenever its equilibrium voice market share is at least 29%. Furthermore, the overall Nash equilibrium of the game can be either symmetric (where Skype's entry is either accommodated or blocked by both MNOs) or asymmetric (where only one has the incentive to accommodate) depending upon the consumers' preference for a certain network and the quality of Skype-based interconnection. In a symmetric accommodation equilibrium, the MNO with a lower (higher) customer valuation is better-off (worse-off) relative to the one where entry is blocked. JEL Classification: D43, L13, L96. Keywords: Mobile network competition; Hotelling model, Voice over IP and Skype; entry; voice and network market shares.