Review of Industrial Organization 19: 227–242, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Entry under Asymmetric Regulation
JAISON R. ABEL
Analysis Group/Economics, One Brattle Square, Fifth Floor, Cambridge, MA 02138, U.S.A.
MICHAEL E. CLEMENTS
U.S. General Accounting Ofﬁce, 441 G Street, NW Washington, DC 20548, U.S.A.
Abstract. In recent years, the local telephone industry has evolved from a traditionally regulated
structure of natural monopoly to one characterized as having a dominant ﬁrm and competitive fringe.
Yet, legacy regulation from the monopoly era still remains in this new environment, and is often
applied solely to the dominant ﬁrm. Economic theory suggests that asymmetric regulation of this
sort will induce competitive entry. We ﬁnd support for this theory by demonstrating that the amount
of entry into local telephone markets is signiﬁcantly higher when asymmetric quality-of-service
standards are present.
Key words: Asymmetric regulation, competitive entry, telecommunications.
The local telephone industry is undergoing a dramatic transition. Once the domain
of rate-regulated monopolies, competitors of many sizes with many different busi-
ness models are entering the local telephone industry. Due to these changes, the
dominant ﬁrm-competitive fringe model of market structure can best describe the
local telephone industry of today. The former monopolies, known as incumbent
local exchange carriers (ILECs), are facing increasing competition from a compet-
itive fringe, ﬁrms known as competitive local exchange carriers (CLECs). While
this transition continues, legacy regulation from the monopoly era remains. For ex-
ample, many state public utility commissions continue to impose quality-of-service
requirements, the subject of this paper. In some instances, the legacy regulation is
asymmetric. Namely, the regulation is applied, or applied more stringently, to one
ﬁrm or group of ﬁrms, typically the ILECs, than other ﬁrms.
This research was conducted while we were afﬁliated with the National Regulatory Research
Institute (NRRI) at The Ohio State University. We wish to thank our many colleagues at the NRRI,
the Department of Economics, and the School of Public Policy and Management at The Ohio State
University for their comments and suggestions on earlier drafts of this paper. We also wish to ac-
knowledge valuable suggestions made by two anonymous referees and the editor. The views and
opinions expressed here are solely those of the authors and do not necessarily reﬂect the views,
opinions, or policies of Analysis Group/Economics, the U.S. General Accounting Ofﬁce, or the
NRRI. Responsibility for any errors is, of course, ours.