Strategic Responses to Entry in Communications Markets: Evaluating Financial Consequences for Incumbents

Abstract

In the last few decades, communications markets have undergone several major institutional disruptions. This article examines the relationship between the entry of new competitors and the economic and financial impacts of such entry contingent on the responses made by incumbents. The context is telecommunications local exchange carriers’ territories in the United States, which has served as a laboratory for institutional experiments in the sector. In markets with greater competitive entry, there has been a significant response by incumbents in increasing advertising spending and reducing selling and overhead costs. Enhanced annual advertising expenditures by incumbents have been estimated to be $600 million, and annual selling cost and overhead cost reductions as $1.3 and $2.1 billion. Given responses to advertising spending, additional annual revenues generated would be around $1.7 billion. Competitor entry in incumbents’ markets have yielded the incumbents annual net economic benefits of $4.5 billion, representing increments to profits of over 22% and up to 45%. To test for the robustness of results, the impact of the different types of mergers that have occurred in the sector have been accounted for in detail. The estimates for the entry variables stay consistent. The idea that disruptive institutional changes cause major resource reconfiguration in firms is supported, and results provide insights on an important issue at the confluence of several literatures.