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An empirical investigation of the stepping-stone hypothesis

Author

Listed:
  • M. Burak Onemli

    (Gediz University)

  • Joel Potter

    (University of North Georgia)

Abstract

To increase competition in local telephone markets, the 1996 Telecommunications Act required incumbent firms to lease important inputs to competitors at regulated prices. Defending this so-called stepping-stone hypothesis, the Federal Communications Commission argued that new entrants needed a foothold in the market- gained by leasing inputs- before they could build their own facilities. Conversely, critics denied the stepping-stone hypothesis by arguing that easier access to inputs discourages new firms from building facilities. Using a new state-level dataset, we empirically test the stepping-stone hypothesis by exploring the effect of regulated input prices on facilities-based entry. Contradicting key results of existing research, we find that under certain conditions, lower regulated input prices can increase facilities-based entry. These findings partially validate the stepping-stone hypothesis.

Suggested Citation

  • M. Burak Onemli & Joel Potter, 2014. "An empirical investigation of the stepping-stone hypothesis," Economics Bulletin, AccessEcon, vol. 34(4), pages 2220-2236.
    • Handle: RePEc:ebl:ecbull:eb-14-00568
    as

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    References listed on IDEAS

    as
    1. Robinson Glen O. & Weisman Dennis L., 2008. "Designing Competition Policy for Telecommunications," Review of Network Economics, De Gruyter, vol. 7(4), pages 1-38, December.
    2. Pindyck Robert S., 2007. "Mandatory Unbundling and Irreversible Investment in Telecom Networks," Review of Network Economics, De Gruyter, vol. 6(3), pages 1-25, September.
    3. Jerry A. Hausman & J. Gregory Sidak, 2005. "Did Mandatory Unbundling Achieve Its Purpose? Empirical Evidence from Five Countries," Journal of Competition Law and Economics, Oxford University Press, vol. 1(1), pages 173-245.
    4. Crandall Robert W. & Ingraham Allan T & Singer Hal J, 2004. "Do Unbundling Policies Discourage CLEC Facilities-Based Investment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-25, June.
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    6. Dale Lehman & Dennis Weisman, 2000. "The Political Economy of Price Cap Regulation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 16(4), pages 343-356, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    facilities-based investment; telecommunications; regulation; stepping-stone hypothesis;
    All these keywords.

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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