The effect of Section 271 on competitive entry into local telecommunications markets: an initial evaluation
Introduction
In 1996 Congress passed the landmark Telecommunications Act (hereafter “the Act”), a measure designed to increase the level of competition in several telecommunications industries. One of the goals of the Act was to open the local telephone network to competition. Pursuant to this goal, the Act, under Section 271, allowed the Regional Bell Operating Companies to offer long distance service to their local customers in a given state when these incumbents could demonstrate to the Federal Communications Commission (FCC) that their own local networks were open to potential local competitors in that state. The incumbent's requirements include allowing local competitors to access each element of their network, either together or separately, including their actual copper loops, switched, and transport facilities. Specifically, the incumbents must price out these unbundled network elements (UNEs) using “forward-looking” incremental costs.1 While other forms of incentive regulation (e.g., price caps) have been applied to incumbent local telephony providers for some time, to our knowledge Section 271 represents a new and unique type of incentive-based regulation where the regulatory authority allows a regulated monopolist into new lines of business if and only if the firm opens its bottleneck facilities to potential competitors and makes these facilities available at rates reflecting the monopolist's forward-looking costs.2 This paper provides initial empirical evidence on the effectiveness of this new regulatory approach.
The Local Exchange Routing Guide (LERG) is used to generate state-level counts of switch-based local competitors from 1996 to 2001. These counts are matched with state-specific independent variables for the corresponding year. The independent variables include a variety of state-specific factors that would affect entry by local competitors, including a state's regulatory regime, population, income, and fiber deployment by the largest incumbent local exchange carrier (ILEC) serving the state.
State-level panel data for 49 states over a six-year period is used to evaluate the effect of FCC Section 271 decisions on entry into the local telephone exchange market. The estimates suggest that the number of competitive local entrants increases immediately before and during the year the approval is granted (presumably as local incumbents open their local networks to competitors in order to gain FCC approval for entry into long distance markets). Ambiguous results are obtained for the effects of Section 271 approval on entry during the year following such approval. Further, the results suggest that Section 271 denials do not have a statistically significant effect on the number of local competitors.
The remainder of the paper proceeds as follows. Section 2 discusses the regulatory history pertaining to the FCC's implementation of Section 271. Section 3 reviews the related literature. Section 4 describes the data and estimation methodology. The initial estimates of the effect of Section 271 on local competitive entry are presented in Section 5. Section 6 concludes and discusses possibilities for future research.
Section snippets
Background
Section 271 of the 1996 Telecommunications Act represents a unique policy experiment. Section 271 allows Regional Bell Operating Companies (RBOCs) to offer long distance within their home states if and only if they demonstrate that their local networks are sufficiently open to competition.3 In most cases, the first step taken by an RBOC seeking Section 271 authority is to obtain recommendation from the state's public utility commission.
Literature review
As mentioned previously, the LERG is employed in this paper to calculate the number of switch-based local competitors in each state. Other authors have studied entry patterns in local telecommunications markets using the LERG data. For example, Zolnierek et al. (2001) employ a LATA-level cross-sectional data set to study the determinants of local competition. The authors use a multinomial logit specification to test demographic and other factors that determine the probability that a given LATA
Data and methodology
The Local Exchange Routing Guide, produced by Telecordia, is designed to assist carriers in their numbering and interconnection. The LERG provides a detailed guide to any carriers that require numbering and interconnection with other carriers. The LERG provides each company's name, contact information, and switch locations by wire-center, LATA, and state. Using the LERG, the number of local competitors in each state on January 1 is derived for every year from 1997 to 2002 and is employed as the
Results
This section presents the empirical results obtained from estimating various forms of the local telecommunications market entry equation [i.e., Eq. (1)]. Table 2 presents the descriptive statistics for the variables employed in the various model specifications. All estimation results include full sets of state dummies, year dummies, and state-specific time trends, although the coefficient estimates pertaining to these variables are not shown in the tables. In addition, estimates of all models'
Conclusion
Using state-level panel data, this paper provides some initial empirical estimates of the impact of Section 271 outcomes on competitive entry into the local telephone exchange market. According to these estimates, the number of local competitors apparently increases in the years immediately preceding (and in the year concurrent with) Section 271 approval. This suggests that the RBOCs may in fact open their networks to local competitors in order to gain FCC permission to offer long distance to
Acknowledgements
The authors thank David Sappington for sharing his data on state incentive regulation plans and the anonymous referees for their helpful comments. The views expressed in this paper are those of the authors and not necessarily those of the Federal Communications Commission, its Chairman or Commissioners, or any other staff. All errors are our own.
References (11)
- et al.
Paragons of virtue? Competitor entry and the strategies of incumbents in the US local telecommunications industry
Information Economics and Policy
(2002) - et al.
The impact of state incentive regulation on the US telecommunications industry
Journal of Regulatory Economics
(2002) - et al.
Entry under asymmetric regulation
Review of Industrial Organization
(2001) - Alexander, D., Feinberg, R., 2001. Entry in local telecommunication markets....
- Beard, R., Ford, G., Koutsky, T., 2002. Facilities-based entry in local telecommunications: an empirical investigation....
Cited by (11)
Debt and communications technology diffusion: Retrospective evidence
2016, Research PolicyCitation Excerpt :In the sector, TA 1996 has required firms to meet certain requirements, under Section 271 of the act, before they could have entered long distance markets (Economides, 1999). Based on the Section 271 approvals data (Brown and Zimmerman, 2004), a dummy variable (Section 271) has been added for the observations obtaining such approvals. A competition intensity variable has been the ratio of competitors in a firm's territory relative to the average number of industry competitors (Competition), based on data for entrants given a license to operate in the various states that the firms have operated in (Majumdar, 2011a).
Horizontal shareholding, technology, and compensation: An evaluation
2021, Managerial and Decision EconomicsCapital Structure and Mergers: Retrospective Evidence from a Natural Experiment
2018, Journal of Industry, Competition and TradeThe impact of market size on new market entry: a contingency approach
2017, European Journal of Marketing