Effect of Network Unbundling on Retail Prices: Evidence from the Telecommunications Act of 1996

This paper empirically examines the effects of network unbundling on retail prices in U.S. local telephone markets. Panel data for 7,604 wire centers in 43 states from 1996 to 2002 are used to estimate the price effects from the unbundling and entry-promoting conditions of the Telecommunications Act. Results show that Section 271 led to the rebalancing of prices between customer groups in which residential prices increased and the prices paid by small businesses decreased. There is some rebalancing of prices between urban and rural regions, with business prices decreasing by a larger amount in urban regions. Our results from all markets indicate that regulators responded rationally to competition by rebalancing prices to reduce cross subsidies.