An empirical investigation of the stepping-stone hypothesis

M. Burak Onemli () and Joel Potter ()
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M. Burak Onemli: Gediz University
Joel Potter: University of North Georgia

Economics Bulletin, 2014, vol. 34, issue 4, 2220-2236

Abstract: To increase competition in local telephone markets, the 1996 Telecommunications Act required incumbent firms to lease important inputs to competitors at regulated prices. Defending this so-called stepping-stone hypothesis, the Federal Communications Commission argued that new entrants needed a foothold in the market- gained by leasing inputs- before they could build their own facilities. Conversely, critics denied the stepping-stone hypothesis by arguing that easier access to inputs discourages new firms from building facilities. Using a new state-level dataset, we empirically test the stepping-stone hypothesis by exploring the effect of regulated input prices on facilities-based entry. Contradicting key results of existing research, we find that under certain conditions, lower regulated input prices can increase facilities-based entry. These findings partially validate the stepping-stone hypothesis.

Keywords: facilities-based investment; telecommunications; regulation; stepping-stone hypothesis (search for similar items in EconPapers)
JEL-codes: L5 L9 (search for similar items in EconPapers)
Date: 2014-10-24
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