Regulatory Restructuring and Incumbent Price Dynamics: the Case of U.s. Local Telephone Markets

Prior to the Telecommunications Act of 1996, many U.S. states restructured their regulatory framework by replacing rate-of-return regulation with competition in both the local exchange service and local long-distance markets and adopting price regulation (price caps and price freezes). Using a panel data set of incumbent Ž rm prices for three services, I investigate whether price regulation and differences in entry conditions affect incumbent operators’ rate structures. I Ž nd that competition has prompted a signiŽ cant amount of rate rebalancing by reducing the amount of cross-subsidization present in local telephone markets. In addition, the added  exibility of price cap regulation speeds the rate rebalance effects of competition.