Actual and potential competition in international telecommunications

- Controlling for changes in actual competition, we find that firms lower prices in response to potential competition
- A hybrid treatment effects model is developed allowing for the estimation of heterogeneous treatment effects (MATE)
- We find that prices are even lower in markets where potential competition is more intense

By allowing carriers to route telephone calls over low-cost private lines, international simple resale (ISR) makes it possible for carriers to provide international telephone service without owning an international circuit. When approved, ISR reduces entry barriers and can increase competition. Using data from US markets from 1995 to 2004, we estimate the effects of ISR on entry and retail prices. Results show that ISR has a limited (and imprecisely estimated) impact on entry and actual competition. However, controlling for actual competition, ISR authorization causes an average reduction in prices of 32.7%. Markets with relatively high carrier surplus experience an additional reduction in the price by 0.4 percentage points, and prices are 3.4 percentage points lower in markets with relatively high private line capacity. Our findings suggest that ISR promotes potential competition and lower prices in markets where the threat of hit-and-run entry is more credible.