'Build or Buy' Strategies in the Local Loop

Abstract

We provide a dynamic model to study how the presence of the option to buy the incumbent local exchange carrier's (ILEC) facilities via local loop unbundling affects the competitive local exchange carriers' (CLECs) incentives to build alternative infrastructures. We show that an unregulated incumbent sets a rental path for its local loop which delays technology adoption compared to the case in which there is no unbundling. We also characterize the equilibrium rental path set by the unregulated incumbent; it is prohibitively high at the initial phases when there is no effective threat of entry with alternative technologies, and it is decreasing over time in later phases. The decrease in the rental price follows the rise of the entrant's opportunity cost of leasing lines. We also argue that neither allowing higher prices for unbundled elements over time nor setting a sunset clause would suffice to induce facility-based competition. By studying the unregulated ILECs decision regarding unbundling, we challenge the implicit assumption behind the sunset clauses, which is that the ILEC would either deny unbundling or charge too high a price for its network elements in the absence of regulation. We claim that the ILECs that initially resist unbundling requirements would tend to charge attractive access prices (relative to the entrants' alternatives) for their infrastructure, which become less essential over time.