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Irrational Expectations: Can a Regulator Credibly Commit to Removing an Unbundling Obligation?

Jeffrey A. Eisenach

American Enterprise Institute; NERA Economic Consulting

Hal J. Singer

Economists Incorporated

December 2007

AEI-Brookings Related Publication No. 07-28

There is a large empirical literature that investigates the effects of unbundling requirements on broadband operators' incentives to invest in infrastructure. To date, that literature has generally relied on industry-wide data as an indicator of how the representative operator reacts to the imposition of mandatory unbundling. In this paper, we present original findings on how specific firms reacted to the removal of an unbundling obligation - that is, an act of regulatory forbearance - either for an existing access technology or for a new access technology. We rely on three case studies to evaluate the impact of regulatory forbearance on specific incumbents and entrants that were directly affected by the regulator's decision. Our findings from the first case study appear to undermine the so-called stepping stone justification for unbundling an existing access technology (for example, the copper loop). In particular, there is a large discontinuity in the investment by entrants around the date of forbearance, in contrast to the steady movement up the ladder of investment predicted by the stepping stone hypothesis. Such a discontinuity suggests that either (1) the regulator failed to signal its deregulatory intentions to entrants, or (2) that the signal was clear but the entrant did not react according to the theory. We also find that incumbent investment increases significantly in response to forbearance from regulating a new access technology (for example, fiber loops). When forbearing from regulating an existing access technology, regulators can signal their future intentions to entrants by slowly increasing the regulated wholesale rate. In the case of forbearing from regulating a new technology, however, there is no equivalent mechanism by which regulators can signal their deregulatory intentions to incumbents. Because a regulator cannot credibly signal its commitment to industry participants, and because such a commitment is critical to the practical success of the stepping stone theory, the best policy for maximizing investment is to accelerate the date of forbearance for existing and new access technologies.

Number of Pages in PDF File: 34

Keywords: unbundling, broadband, forbearance

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Date posted: March 10, 2009 ; Last revised: April 14, 2009

Suggested Citation

Eisenach, Jeffrey A. and Singer, Hal J., Irrational Expectations: Can a Regulator Credibly Commit to Removing an Unbundling Obligation? (December 2007). AEI-Brookings Related Publication No. 07-28. Available at SSRN: https://ssrn.com/abstract=1065161 or http://dx.doi.org/10.2139/ssrn.1065161

Contact Information

Jeffrey A. Eisenach (Contact Author)
American Enterprise Institute ( email )
1150 17th Street, N.W.
Washington, DC 20036
United States
NERA Economic Consulting
1255 23rd Street, NW, Suite 600
Washington, DC 20037
United States
202-466-3510 (Phone)
202-466-3605 (Fax)
HOME PAGE: http://www.nera.com
Hal J. Singer
Economists Incorporated ( email )
2121 K Street N.W.
Suite 1100
Washington, DC 20037
United States
202-747-3520 (Phone)
HOME PAGE: http://www.ei.com/viewprofessional.php?id=71
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