Did Federal Regulation Discourage Facilities-Based Entry into U.S. Local Telecommunications Markets?

In the United States from 2001 to 2006, federal regulations allowed entrants to lease from incumbents at relatively low cost all of the network infrastructure necessary to provide local phone service. These platform entrants could then provide phone service without installing any of their own equipment. Advocates of this policy claimed that it was needed to provide an economically feasible means by which entrants could serve residential customers. Critics contended that the policy substantially deterred loop entry whereby entrants installed their own switching equipment and leased only the wires that connect a customer’s premises to the telephone network. An analysis of panel data for each state over this period indicates that the policy’s critics may have been correct. The crossprice elasticity of loop entry with respect to platform price was roughly 1.0. A back of the envelope calculation suggests that loop entry may have decreased by roughly 20% due to platform entry price reductions. ∗I thank Donald Stockdale and Ellen Burton of the FCC for their insights into the FCC data. This paper also benefitted from comments by participants at the 2007 International Industrial Organization Conference. Finally, I am indebted to Chunrong Ai, David Gabel, Mark Jamison, and especially David Sappington for their valuable advice.