Entry and investment: retrospective evaluations of incumbents’ responses in communications markets

Abstract

Investment in the face of entry is a strategy used by incumbents. Nevertheless, the concept applies to traditional sectors of industry and not for contemporary two-sided network contexts. This article reports a study examining the behaviour of incumbent local exchange carriers in the US telecommunications with respect to technology investments in the face of competitive entry over a 14-year period, 1988 to 2001. In the face of competitive entry, the incumbents have underinvested in broadband technology, an approach consistent with desires to constrain entry, reflecting an unwillingness to supply unbundled network services at low rates or an inability to be pro-active in making technology investments. The evidence displays interesting dynamics in the investment behaviour of incumbent telecommunications firms as their markets have become competitive. These dynamics are explained using behavioural economics, and the use of behavioural concepts is highlighted for designing regulatory and competition policy mechanisms in contemporary communications markets.