An Examination of Market Power in the Intrastate Long‐Distance Telephone Service Markets: Evidence from a Natural Experiment

Abstract

During the preceding 2 decades, state public utility commissions have experimented extensively with regulating telecommunications carriers. More recently, many states have more or less deregulated long‐distance service. This paper employs a panel data set of states to examine whether the competitive conduct of long‐distance carriers was affected by these events. A methodology is developed to estimate changes in the market conduct parameter following states’ decisions to price deregulate long‐distance service. This effect is isolated by using a difference‐in‐difference estimator that compares the change in market conduct of the treatment group (states deregulated during the study period) to the change in market conduct of the control group (states deregulated throughout the study period). My hypothesis is that elimination of price regulation altered the carriers’ market conduct and that this change in conduct explains, in part, the price differences in regulated and deregulated markets. The results confirm my hypothesis.