Competition and Technology Adoption in Two-Sided Network Markets

Abstract

Investment in the face of entry has been a strategy used by incumbents firms. Nevertheless, the concept applies to traditional sectors of industry and not for contemporary network contexts. This article reports a study that has examined the strategic behavior of the incumbent local exchange carriers in the United States telecommunications with respect to technology investments in the face of competitive entry over a fourteen year period, 1988 to 2001. The general finding is that in the face of competitive entry the incumbents underinvested in broadband technology, an approach consistent with desires to constrain entry or reflecting an inability or unwillingness to supply unbundled network services at low rates. The possibilities of inter-modal cable competition also led to underinvestment of broadband, which could be made potentially obsolete by cable companies, but positive investments in digital technologies. Controlling for firm-specific behavior, in the post-1996 period, after the Telecommunications Act was passed, it was noted that the Bell operating companies displayed positive investment patterns. The evidence displays interesting dynamics at work in the investment behavior of telecommunications firms as the market has become competitive.