Promoting innovation and the deployment of advanced telecommunications services to businesses

Contemporary Economic Policy, April, 2008 by David J. Gabel, Kenneth Guang-Lih Huang

The authors hypothesize that the number of competitors in a market has a nonlinear effect on the incumbent's decision to deploy ATS. Therefore, the natural log of the number of the competitors was used as the explanatory variable. Since the natural log of zero is undefined, the value for the number of potential competitors was changed to the value observed plus 1.

C. Regulation

The FCC uses either ROR or PC regulation to control the prices charged by ILECs. PC regulation is mandatory for the large RBOCs. Other companies choose if to be governed by ROR or PC regulation. Therefore, we treat the form of regulation as exogenous for large companies and endogenous for other firms. We used an instrument for the decision of a company to become a voluntary PC company or to remain rate-base regulated and a linear probability model (LPM) to estimate this binary value. Our instrument, the number of access lines per holding company, (4) is highly statistically significant. The F value for the instrument has a p value of approximately 0. Table 3 shows the results of the regression model.

The decision to become a voluntary PC company is made by the holding company, which is much different than the unit of the observation used elsewhere in this paper, the wire center. In order to conduct the traditional partial F test for an instrument as recommended by Staiger and Stock (1997), we would have had to conduct our analysis at the level of the holding company. The aggregation of the data would have eliminated much of the richness of the data set, which allows us to identify how local conditions impact deployment conditions. Therefore, we have only used the number of lines served by the holding company as an instrument for PC election. As shown in Table 3, the instrument has strong explanatory power.

Current literature has generally been supportive of the proposition that PC regulation spurs innovation and increases investment (Federal Communications Commission, 1999; Greenstein, McMaster, and Spiller, 1995; Kridel, Sappington, and Weisman, 1996). The authors postulate that the presence of PC regulation will increase the likelihood of ATS availability relative to federal ROR regulation.

Section 271 of the Communications Act of 1934 requires RBOCs to file applications with the FCC on a state-by-state basis in order to provide in-region inter-LATA (local access and transport area) services. In order to receive approval to provide inter-LATA service (271 approval), an RBOC must convince the FCC that it has irrevocably opened its market to competitors. To control for these activities, the authors' database includes the date that an RBOC received 271 approval from the FCC. The authors postulate that once the RBOCs have received 271 approval, the deployment of ATS will be more likely because the threat of competitive entry is greater.

The database also includes for each state the ratio of UNE loop price (Gregg, 2002) divided by the embedded loop cost (calculated from NECA data as of December 31, 2000, on the basis of total loops). This ratio is a benchmark commonly used by the investment community to assess investment and make decisions. For example, Wall Street analysts have downgraded their ratings of RBOC stocks based on the lost profits associated with UNE rates (Commerce Capital Markets, 2002; Dresdner Kleinwort Wasserstein Securities, 2002; UBS Warburg, 2002). The same ratio is used for all ILECs in a state under the assumption that the ratio is a good proxy for the statewide regulatory climate. This ratio is an appropriate measurement of how favorable the regulatory regime in a particular state is to the RBOCs in terms of the unbundling mandate in Section 251(c) of the Telecommunications Act. The higher the ratio, the more favorable the regulatory environment is to the RBOCs. The authors postulate that when the ratio is high, ILECs are more likely to invest in facilities to deploy ATS since the possibility of recouping their investment is greater.