Retail Prices and Facility-Based Entry into the Telecommunications Market

There is growing sentiment that rate rebalancing to eliminate crosssubsidies between local business and local residential telephone marketsis necessary to induce efficient entry in the residential market. If theelasticity of supply with respect to the relative prices for businessand residential local service is high in both the local business andlocal residential markets, then the efficiency gains from rebalancingmay be large. Alternatively, other factors related to differences incharacteristics between business and residential local telephonemarkets, such as lower costs, lower elasticity of demand, and greaterwillingness-to-pay for quality or redundancy in the business segment oflocal telephone may be more important determinants of entry. In thispaper we simultaneously measure the elasticity of supply in the businessmarket with regards to the price of business services relative to theprice of residential service, using entry, economic and demographic dataa the wire center level. We find that business entry is driven by marketdemand and cost characteristics, and that the effect of cross subsidiesin prices on entry is less clear.