A Dynamic Model of Incumbent LEC Response to Entry Under the Terms of the Telecommunications Act of 19961

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This paper dynamically models an incumbent Local Exchange Carrier's (LEC's) ability to control market entry with a profit squeeze. The model is consistent with the post-Telecommunications Act of 1996 local exchange market. The model shows that an unconstrained incumbent could choose output prices and input costs to discourage an entrant's output-market production. The impact of a regulatory constraint on incumbent behavior is examined. It is concluded that cost-based input prices may lead to little growth in the entrant's self-provision of inputs and that continuing oversight of output and input prices may be necessary.

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