An empirical investigation of the stepping-stone hypothesis (original) (raw)

Economics Bulletin, 2014

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.

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