We consider a situation where a new firm enters a monopoly market with a slightly differentiated service from the existing service of the incumbent. The entrant firm's service is assumed to be of a little lower quality and offered at a lower price. We examine a choice problem of customers between the service and price options in two situations where the service is supplied (i) by contract and (ii) freely. After analyzing customer's choice model, we incorporate simulation techniques into it. We use three variables to represent customer type. These variables are (1) present usage of service, (2) price elasticity, (3) customer's evaluation of entrant firm's service. The probability distributions of three variables are derived from empirical data. In the process of simulation we predict the market size, the market share of each firm and changes in the consumer surplus at vaious price differentials. As far as consummer surplus is concerned, non-contract system is superior to contract system. Non-contract system is advantageous to entrant firm if it supplies relatively low service quality. Introduction of competition in the telecommunications market improves the consumer surplus, but it may create social cost of duplicate investment. We check the relationship between a change in social welfare and a cost sturcture of the entrant. We find that it requires very cost-efficient entrant for social welfare to increase when competition is introduced.
