Details of Analysis

Intermodal Competition

An additional competitive factor controlled for dealt with intermodal competition from cable companies (Loomis & Swann, 2005). These possibilities could intensify competition in local exchange markets, and make these markets unattractive for her new entrants. The erstwhile AT&T, the long-distance company, had purchased several cable companies, such as TCI, Media One, and Lenfest in 1999. It also purchased the down- town Boston assets of Cable Vision. All these cost well over $100 billion, and the AT&T cable business could provide substantial competition to incumbents and new entrants. A dummy variable (AT&T Cable), coded as 1 for the years that AT&T owned its cable assets and 0 otherwise, was included to account for the AT&T intermodal competitive threats.

Residual Environmental Effects

The effect of mergers on entry could be confounded by other factors occurring simultaneously within the sector, such as the diffusion of wireless services, and other exogenous economic circumstances, such as macroeconomic events. To evaluate whether or not the mergers had an impact exclusive of such time-related factors on entry, a time index variable (time index) was added in the regressions.

Price Regulation Effects

A variable controlled for the impact of price regulation on entry in the local exchange sector (Abel, 2002; Majumdar et al., 2010). Over the period evaluated, there were major transitions in regulatory regimes, principally a movement away from rate of return regulation. These changes were expected to be major (Sappington, 2002). Rate of return regimes could be entry deterring, as firms engaged in cost-pass-through, making entrants’ business models uncompetitive.

Data on state-specific regulatory regime changes in the United States telecommuni- cations industry have been collated and maintained by David Sappington (Sappington, 2002) and Dennis Weisman (Weisman, 1993). The latest full set of data was made available by their generosity. For all of the firms, if the regulatory regime was based on rate of return principles (rate of return regulation) it was coded as such for each period relative to other regulatory regimes in operation.

For firms that operated in multiple state jurisdictions that might vary in regulatory regimes, a weighted average value for the regulatory regime was computed for each operating company observation by weighting the regulation observation by the proportion of lines that each state contributed to the total access lines operated by the company. This approach was consistent with the literature (Brown & Zimmerman, 2004; Majumdar, 1997, 2011; Sappington, 2002).

Technology Effects

A measure used to capture technology deployment by the ILECs was the ratio of the total kilometer of fiber cable to total access lines (technology). This measure evaluated ILECs’

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Additional Controls

Additional controls were required. See Majumdar (2011) for extensive details. A factor affecting demand was the extent of business lines. The business lines construct (business) was the ratio of total business lines to total access lines for each firm. Larger business line shares could encourage entry. Similarly, a higher urban population ratio in a territory could attract entry. The urban population ratio (urban) was the weighted average ratio of urban population to total population in each firm’s territory. This ratio was weighted by the fraction of lines that the firm had the operating rights to in specific states. These factors might have had an opposite effect, though; in business-rich and urban locations, a strong ILEC could provide robust competition and scare new entrepreneurial entrants off.

The use of market share constructs was a proxy for ILECs’ market position. A firm with a stronger market position could exercise power for entry deterrence. The market position variable (market position) was constructed by taking the ratio of a firm’s total number of lines across the states it operated to the total number of lines in all states it operated in. The use of the market share construct was a proxy for the possible market or regulatory power of the local exchange carriers. In regulated industries, a high market share does not imply monopoly behavior. Yet, inclusion of the markets a firm was involved with, in market share calculations, provided a sense of the relative presence of that firm in its territory.

Entry was found to be positively related to industry performance and growth (Sieg- fried & Evans, 1994). Two controls, taking into account these possibilities, were ILECs’ past financial performance (performance), calculated as the ratio of total revenues to total operating assets, and a revenue growth (growth) variable. Incumbents’ size could influ- ence entry; a size variable (size) was included. The log of total operating revenues was the size measure. Similarly, a higher customer expenses ratio could attract entry as the incumbent had developed the market. The ratio used (customer) was the ratio of customer expenditures to total revenues for each incumbent firm.

Control for Past Entry

Finally, a control was included for past entry, to control for possible firm-specific effects of the different entrants as well as territory-specific effects on entry. A particular territory that had experienced above average entry in the past might experience similar contemporaneous entry. For each observation, a variable was constructed as the ratio of past period entry to average entry in the industry as a whole for that earlier period (prior entry) . This variable, as constructed, controlled for territory-specific drivers of entry other than merger effects.

Appendix 1 contains a correlation matrix for the different variables.

20. An important concept is that of information and communications technologies being general purpose technologies (Bresnahan & Trajtenberg, 1995; Jovanovic & Rousseau, 2005; Lipsey, Carlaw, & Bekar, 2006). Among information and communications technologies, broadband networks, such as fiber optic networks, are of a general purpose nature (Majumdar, 2008). The general purpose nature of broadband permits multiple users of the network. It enhances the size and scope of a telecommunications gateway and permits system expansion. The diffusion of broadband technology within telecommunications firms increases network variety.

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