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Retail Prices and Facility-Based Entry into the Telecommunications Market

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    There is growing sentiment that rate rebalancing to eliminate cross subsidies between local business and local residential telephone markets is necessary to induce efficient entry in the residential market. If the elasticity of supply with respect to the relative prices for business and residential local service is high in both the local business and local residential markets, then the efficiency gains from rebalancing may be large. Alternatively, other factors related to differences in characteristics between business and residential local telephone markets, such as lower costs, lower elasticity of demand, and greater willingness-to-pay for quality or redundancy in the business segment of local telephone may be more important determinants of entry. In this paper we simultaneously measure the elasticity of supply in the business market with regards to the price of business services relative to the price of residential service, using entry, economic and demographic data a the wire center level. We find that business entry is driven by market demand and cost characteristics, and that the effect of cross subsidies in prices on entry is less clear.

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    File URL: http://www.netinst.org/Gabel_Gideon.pdf
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    Paper provided by NET Institute in its series Working Papers with number 05-15.

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    Length: 23 pages
    Date of creation: Oct 2005
    Date of revision: Oct 2005
    Handle: RePEc:net:wpaper:0515
    Contact details of provider: Web page: http://www.NETinst.org/

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