An Analysis of the Welfare Effects of Long-Distance Market Entry by an Integrated Access and Long-Distance Provider1

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Abstract

This paper discusses the welfare effects of entry by a vertically integrated access and long-distance service provider into the long-distance market. Using a stylized model of these markets, we conclude that substantial net consumer benefits arise when a vertically integrated firm is created by the entry of a LEC into the long-distance market, and these gains are mostly achieved from declines in supra-competitive profits received by long-distance incumbents. We find that these gains dominate losses in producer surplus that could arise even if integrated firm entry were to displace more efficient long-distance providers.

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