Entry under Asymmetric Regulation

Abstract

In recent years, the local telephone industry has evolved from a traditionally regulated structure of natural monopoly to one characterized as having a dominant firm and competitive fringe. Yet, legacy regulation from the monopoly era still remains in this new environment, and is often applied solely to the dominant firm. Economic theory suggests that asymmetric regulation of this sort will induce competitive entry. We find support for this theory by demonstrating that the amount of entry into local telephone markets is significantly higher when asymmetric quality-of-service standards are present.