Facilities Competition and Local Network Investment: Theory, Evidence and Policy Implications

A new approach has emerged in the United States and elsewhere in the world for promoting investment in local communications networks. Competition, especially facilities-based entry, has become a principal means to encourage the efficient amount and timing of investment in local exchange infrastructure and adoption of advanced technologies. Despite the popularity of open entry policies, the logic underlying these policies lacks convincing evidence. Nevertheless, preliminary and incidental studies suggest that facilities-based entry stimulates investment by both incumbents and entrants. The message for policymakers is, first, to remove artificial restrictions on facilities-based entry and on incumbent investment, both as a response to competition and in advance of entry; and, second, to take account of the possibility of a virtuous cycle of investment deriving from incumbent-entrant interaction. These measures promise to supplement the ordinary benefits of facilities competition that will aid in building the next generation advanced communications network.