Paragons of Virtue? Entry Threat and Strategies of Incumbents

in the US Local Telecommunications Industry


Heli A. Koski and Sumit K. Majumdar


Abstract

The Telecommunications Act of 1996 has opened hitherto closed local exchange markets to entry by competitive local exchange carriers (CLECs). A recent August 1999 FCC report on local competition has documented that there has been vigorous market entry during the past years. However, the market share of the entrants has remained insubstantial. In this article we investigate whether and in what respects the presence of new competitors influences the behaviour of incumbent local exchange carriers (ILECs) with respect to pricing, advertising and the extent of activity diversification that they engage in. We explore this question empirically, using data for the major US local exchange carriers for the years 1994-1998. Our estimation results indicate that the threat provided by market entrants has notably influenced the strategic behaviour of (ILECs). Our empirical findings show that the incumbent US local operators, particularly the larger ILECs, aggressively protect their profit streams from traditional business. Our data clearly demonstrates that the ILECs have responded to the Telecommunications Act 1996, and to the threat of market entry it has created, by adopting aggressive entry deterrence strategies. Apparently, this strategic behaviour has been successful as yet, providing ILECs with the protection of their monopolistic markets.