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Competition and subsidies in the deregulated US local telephone industry
Author(s) -
Fan Ying,
Xiao Mo
Publication year - 2015
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12109
Subject(s) - subsidy , monopolistic competition , monopoly , competition (biology) , industrial organization , business , economics , barriers to entry , value (mathematics) , microeconomics , market economy , ecology , biology , machine learning , computer science
The 1996 Telecommunications Act opened the monopolistic US local telephone industry to new entrants. However, substantial entry costs have prevented some markets from becoming competitive. We study various subsidy policies designed to encourage entry. We estimate a dynamic entry game using data on potential and actual entrants, allowing for heterogeneous option values of waiting. We find that subsidies to smaller markets are more cost effective in reducing monopoly markets, but subsidies to only lower‐cost firms are less cost effective than a nondiscriminatory policy. Subsidies in only early periods reduce the option value of waiting and accelerate the arrival of competition.