How Long Is A Piece Of Wire? Equilibrium Determination Of Local Telephone Areas

This paper studies the endogenous determination of the nature of telephone calls, namely whether they are local or long distance. Calls between users in the same local calling area are local, and we allow the extension of this area to be treated as a strategic variable. We show that the extension of the calling areas which maximises the carrier's profit is the same that a welfare maximising regulator would choose. Under a price cap regime in which prices are required to meet an average price constraint, the firm is shown to manipulate strategically the extension of the local calling areas. We end the paper by considering the case of a competitive market. In this case, again, the owner of the local loop manipulates the extension of the local calling areas to increase profits.