The Impact of Intralata Competition on Local Exchange Company Prices

Abstract

The divestiture of AT&T from the Bell Operating Companies (BOCs) in 1984 resulted in major changes in the interstate telephone service market. In addition, the intrastate telephone service market has been affected. The most evident effects of divestiture on the intrastate market have been to change the method by which long distance telephone service subsidizes local telephone service and to make the subsidy more of an explicit transfer (Kaserman, Mayo, and Flynn 1990). The state Public Service Commissions (PSCs), who are responsible for regulating intrastate telephone services, have also become more inclined to allow competition in the various intrastate markets since divestiture. These changes in the intrastate telephone market provide an excellent opportunity to examine the effects of competition and the changing regulatory environment on the prices of intrastate telephone services. Papers by Mathios and Rogers (1989) and Kaestner and Kahn (1990) examine the effects of deregulation and competition on the price of intrastate interLATA telephone service, while Kaserman et. al. (1990) examine the impact of changes in the long distance to local subsidy on the price of local telephone service. The purpose of this paper is to add to this recent literature, by examining the effects of competition on the prices on intrastate intraLATA telephone services.