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Entry under Subsidy: the Competitive U.S. Local Telephone Industry

Mo Xiao and Ying Fan ()
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Mo Xiao: University of Arizona

No 374, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: The 1996 Telecommunication Act introduces entry into an originally monopolistic U.S. local telephone industry. As competitors cherry pick rich, urban markets to enter, the Act calls for an explicit and pro-competitive subsidy policy to narrow the potential divide in telecom infrastructure. To study relevant economic factors in the design of such a policy, we estimate a dynamic oligopoly entry game using data on the competitors' entry decisions into local markets. As we observe the identities of potential entrants and their waiting time before actual entry, we allow these firms to be heterogeneous long-run players who have the option value of waiting. We find that both market- and firm-level heterogeneity plays an important role in a potential entrant's local entry decisions. Moreover, these entry decisions are significantly influenced by the consideration of both current and future competition. Using structural estimates, we evaluate the effectiveness of different subsidy policies.

Date: 2012
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