Open Entry and Local Telephone Rates: The Economics of IntraLATA Toll Competition

The Telecommunications Act of 1996 removes state-level legal and regulatory barriers to entry that previously have proscribed facilities-based interchange carriers from entering intraLATA toll markets. Traditionally, these markets have provided excess profits that local exchange companies ostensibly have used to subsidize local telephone rates. Elimination of these entry barriers, then, raises concern that the resulting intensification of competition will force unwanted local residential rate increases. In this paper, we critically examine the local-rate-increase question both theoretically and empirically. Our analysis finds no evidence that intraLATA toll competition will adversely affect local rates.