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"Build-or-Buy" Strategies in the Local Loop

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  • Marc Bourreau
  • Pinar Dogan

Abstract

We provide a dynamic model to study how the presence of the option to "buy" the incumbent local exchange carrier's (ILEC) facilities via local loop unbundling affects the competitive local exchange carriers' (CLECs) incentives to "build" alternative infrastructures. We show that an unregulated incumbent sets a rental path for its local loop which delays technology adoption compared to the case in which there is no unbundling. We also characterize the equilibrium rental path set by the unregulated incumbent; it is prohibitively high at the initial phases when there is no effective threat of entry with alternative technologies, and it is decreasing over time in later phases. The decrease in the rental price follows the rise of the entrant's opportunity cost of leasing lines. We also argue that neither allowing higher prices for unbundled elements over time nor setting a sunset clause would suffice to induce facility-based competition. By studying the unregulated ILECs decision regarding unbundling, we challenge the implicit assumption behind the sunset clauses, which is that the ILEC would either deny unbundling or charge too high a price for its network elements in the absence of regulation. We claim that the ILECs that initially resist unbundling requirements would tend to charge attractive access prices (relative to the entrants' alternatives) for their infrastructure, which become less essential over time.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 2 (May)
Pages: 72-76

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Handle: RePEc:aea:aecrev:v:96:y:2006:i:2:p:72-76

Note: DOI: 10.1257/000282806777212242
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  1. Michael H. Riordan, 1992. "Regulation and Preemptive Technology Adoption," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 334-349, Autumn.
  2. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc.
  3. Pindyck Robert S., 2007. "Mandatory Unbundling and Irreversible Investment in Telecom Networks," Review of Network Economics, De Gruyter, vol. 6(3), pages 1-25, September.
  4. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  5. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-48, September.
  6. Bourreau, Marc & Dogan, Pinar, 2005. "Unbundling the local loop," European Economic Review, Elsevier, vol. 49(1), pages 173-199, January.
  7. Crandall Robert W. & Ingraham Allan T & Singer Hal J, 2004. "Do Unbundling Policies Discourage CLEC Facilities-Based Investment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-25, June.
  8. Economides, Nicholas, 1998. "The incentive for non-price discrimination by an input monopolist," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 271-284, May.
  9. Beard, T Randolph & Kaserman, David L & Mayo, John W, 2001. "Regulation, Vertical Integration and Sabotage," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 319-33, September.
  10. Gallini, Nancy T, 1984. "Deterrence by Market Sharing: A Strategic Incentive for Licensing," American Economic Review, American Economic Association, vol. 74(5), pages 931-41, December.
  11. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
  12. repec:reg:wpaper:337 is not listed on IDEAS
  13. Bourreau, Marc & Dogan, Pinar, 2004. "Service-based vs. facility-based competition in local access networks," Information Economics and Policy, Elsevier, vol. 16(2), pages 287-306, June.
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