The Telecommunications Act of 1996 and Imposed Costs in the Local Exchange Market:
A Dynamic Model of Incumbent Behavior


Trevor R. Roycroft, Ph.D.
J. Warren McClure School of
Communication Systems Management
Ohio University

Abstract

A dynamic model is used to discuss the ability of incumbent Local Exchange Carriers (LECs) to
control market entry by imposing both transaction and operating costs on rivals under the terms of
the Telecommunications Act of 1996. The model indicates that the incumbent may find it profitable
to choose higher levels of transaction costs if those costs can be imposed on entrants, even if it must
bear the same costs. Additionally, the limited ability of imputation to control an incumbent's ability
to impose operating costs on rivals is discussed, along with the insufficiency of price regulation for
input prices.