Mandated access and the make-or-buy decision: the case of local telecommunications competition

When the facilities of an incumbent monopolist are made available to potential competitors through some type of “essential facilities” or related claim, a concern is that the ability to “buy” inputs substantially attenuates the incentive to “make” inputs. We evaluate both theoretically and empirically the relationship between “make” and “buy” and find three sometimes-conflicting effects are present, of which the substitution effect is only one. Our empirical example considers the deployment of switching facilities by entrants to local exchange telecommunications markets, and these empirics indicate that the substitution effect is not dominant in this particular case.