Cream Skimming

The model is based on an incumbent serving a franchise area that can be divided into an urban and a rural sub-market. Price is determined by three factors: 1) competition in a (sub-)market; 2) the marginal cost in a (sub-)market; and 3) elasticity of demand in a (sub-)market. Competition clearly lowers price in the competitive areas. If the incumbent charges a uniform price over the entire franchise area then competitive effects are felt in the entire franchise area. In the case where entry induces non-uniform pricing by the incumbent, the differences in costs and elasticity from their franchise wide values can affect prices. With non-uniform pricing, lack of competition, higher marginal costs and more inelastic demand in a sub-market each imply higher prices in that sub-market