This dissertation investigates the entry and exit dynamics on the local telephone market and the cable television markets. An important feature pertaining to the study of these markets is the large amount of capital investment in building local telephone networks or cable television system infrastructures. Most of these costs are very industry-specific and irreversible. The classic entry decision will then depend on both a firm's current state and its expected future values. Rapid technological development and progress during the past fifteen years, however, has dramatically reduced the costs in transmission and digital compression, which has not only lowed the general entry barrier but also indicated various ways to enter into the telecommunications service market. Heterogenous firms will seek the most profitable way to enter the targeted market by comparing the discounted present values of all entry alternatives.The first chapter is an empirical study of entry and exit in local telephone markets. It is in line with a large literature in industrial organizationhas analyzed the relationship between the degree of firmheterogeneity and the entry and exit pattern of an industry overtime. Using a panel data set on the entry and exit of firms in thelocal telephone market in Pennsylvania from 1996 to 2003, I examines two sources of firm heterogeneity: the levelof pre-entry experience of the firm and whether the firm owns orrents its capital equipment. In particular, this research studieshow differences in firms prior to their entry affects theirsubsequent performance in the local telephone market. First, the firms renting its capital equipment(``reseller") are found to consist of a higher percentage of experienced firms than the firms owning its equipment(``facilities-based"). Second, the firms with many years of related-business experience pre-entry(``experienced") have lower turnover rates than the firms with very few or zero years of experience(``inexperienced"), and this difference is not observed in the group comparison between ``reseller" and ``facilities-based". Lastly, the early cohort of ``inexperienced" firms is more likely to survive longer than the later cohort; yet, this is not true of ``experienced" firms. These findings indicate that heterogeneous firms choose a different entry or exit path to lower the total costs of large amount of investment when they make entry decisions into the local telephone market.With a market-level panel data, I investigate the broadband diffusion among cablesystems, a type of facility-based broadband provider, andexamines how competition policyaffects the diffusion pattern across over nine states in the U.S. during the period from 2000 to 2005. Two stages of broadband investment are distinguished, namelythe decision to upgrade a currently one-way system intoa two-way system and the subsequent decision to offer digitalproducts. The second chapter also examines the role of competition, regulation and other demand and cost factorsin both decisions. Empirical evidence shows that economies of scale and economies ofscope both encourage the large cable system to upgrade its networkinfrastructure and offer more advanced broadband digital services. The digital video service competition andthe high-speed Internet access service competitionare found to have different influences on the cable systems' upgrading anddiversification decisions. In addition, the local regulatory environment also affects the cable system'supgrading decision.An interesting observation found in the data set used in the second chapter motivates my last paper. I observe a substantial percentage of cable systems initially offering only one kind of broadband digital services (i.e. either high-speed Internet access or digital video programming service), after making a large amount of investment in upgrading their one-way cable system, and then adding the other broadband digital service a few years later. This observation of sequential diversification suggests that the differences in entry costs along different entry paths may exist. Given the panel length of only six years, the multinomial logistic model cannot capture the dynamic impact of different sunk entry costs in the broadband market to provide a valid explanation for such an observation. In the last chapter, I build a dynamic structural model of individual cable operators' decisions to diversify intooffering broadband digital services such as high-speed Internetaccess and digital cable television when their cable systems have been upgraded already. I estimate a dynamic programming model of theseinvestment decisions and quantify how ownership, local marketcharacteristics, economies of scope, economies of scale and sunkcosts in this industry together impact firms' investmentdecisions, by affecting the discounted expected profits ofdifferent choices. I find that theentry costs and unobserved fixed costs of offering differentbroadband digital services significantly affect cable operators'entry decisions. The entry cost for offering two digital servicessimultaneously is substantially greater than the cost of offeringonly one digital service as well as the sum of entry costs whensequential diversification is undertaken. In addition, I findthat the probability of offering digital service rises with localmarket revenue for basic cable services, and economies of scopeand economies of scale encourage cable operators to eventuallydiversify into offering two digital services.This study providesan explanation for the delayed broadband diffusion, and predictsthat policies to lower entry costs can help the cable operators toaccelerate broadband diffusion. When sunk cost parameters are reduced, the cable systems start their digital offering earlier and more systems end up offering two digital products. Increasing the sunk cost for sequential diversification decreases the option value for delaying further broadband diversification. The model also predicts that a non-discriminatory subsidy to the basic cable service will not accelerate the cable systems' broadband diversification and will decrease the total number of systems that offer both digital products at the end of the sample period.
