Factor Substitution in Long-Distance Telecommunications

Abstract

Long distance companies such as AT&T and MCI, while producing over $60 billion annually in long distance revenues, spend approximately 40% of these revenues in purchasing access to the facilities of the local telephone companies in order to complete long distance calls. Frequently, long distance companies will choose a factor input known as switched access (referring to access to the loop and switches of the local telephone companies for connection to final customers) in order to complete long distance calls. Alternatively, long distance companies can substitute away from switched access by leasing dedicated circuits from local telephone companies. The leasing of dedicated circuits from local telephone companies to complete long distance calls along a specific route is called special access. The substitution of special access for switched access has been termed bypass' since it bypasses the traditional switched systems of the local telephone companies and the attendant usage-based switched charges.2 In the mid and late 1980s, to reduce the incentive to bypass local telephone companies' switched access service, the Federal Communications Commission substantially reduced the price of switched access.3 It is less well known that the price of special access fell substantially during this time period and the quantity of special access lines increased