From C to Shining C : Competition and Cross - Subsidy in Communications

supports research bearing on economic and public policy issues. The SIEPR Discussion Paper Series reports on research and policy analysis conducted by researchers affiliated with the Institute. Working papers in this series reflect the views of the authors and not necessarily those of Abstract A major directive of the Telecommunications Act of 1996 is that regulators are to remove implicit subsidies that have characterized prices in the market for telecommunications. In this paper, we examine the relationship between local telephone rates and estimates of the cost of providing services to determine whether regulators are following this directive. We find that large amounts of cross subsidy still exist in local rates and that these cross subsidies are having a significant impact on the development of competition. We not only find that rates do not reflect costs, but find that revenues are inversely related to the estimated cost of providing service. Using these data, we examine the effect cross subsidies are having on entry. Generally, we find that large differences between revenues and costs in a particular wire center, as expected, attract competitors. These results suggest that regulators are having a large impact on the development of competition – attracting competition in some areas, while making entry into many markets untenable. Finally, we examine whether explicit federal subsidies make entry more attractive in high-cost areas.