Entry Barriers and Technological Innovation in Broadband

Abstract

In this article, I present causal effects of institutional entry barriers to new firms on incumbents’ technological innovation. In particular, I investigate the effect of entry barriers to municipal providers on incumbents’ technology deployment in the U.S. broadband industry. I use a spatial regression discontinuity design for private incumbents’ investment behavior and different entry regimes as sharp cutoffs for municipal entry threat. I collect and combine unique firm-level data on cable investment decisions and state-level data on legal entry barriers. I find that in markets with these entry barriers incumbents invest less in new technologies. Specifically, I find that the local entry barriers lead to a 20% lower technology adoption rate by cable incumbents because of reduced entry threat. These results imply that institutions that restrict entry of new firms can lead to significantly decreased technological innovation and lower internet quality across local markets, not only by deterring new firms but also by altering incumbents’ strategic investment in broadband networks.