The Results of Competition Between Integrated-Services Telecommunications Carriers

This paper investigates the results of competition between two profit-seeking telecommunications carriers, as might occur when cable TV providers compete with local exchange carriers. Each firm has a fixed capacity that it can use to offer two different services, such as telephony or video. We explore whether an equilibrium exists at which no carrier has any incentive to change its prices and outputs. For arbitrary services and demand, we show that an equilibrium may not exist, or that multiple equilibria may exist which means non-market forces such as regulation and entry strategy might determine the final outcome of competition. Furthermore, it is shown that a firm may not choose to compete in the market for one of the services, and thus, the lack of market share does not imply a barrier to entry. However, we also show that these confounding phenomena are less likely to occur with the services that will probably be offered first on commercial integrated-services networks, like telephony, pay-per-view movies, and email.