Empirical studies on local competition, regulation and broadband diffusion in the U.S. telecommunications industry
This dissertation investigates the entry and exit dynamics on the local telephone market and the cable television markets. An important feature is the large amount of capital investment in building local telephone networks or cable television system infrastructures. Most of these costs are very industry-specific and irreversible. The classic entry decision will then depend on both a firm's current state and its expected future values. Heterogeneous firms will seek the most profitable way to enter the targeted market by comparing the discounted present values of all entry alternatives.
The first chapter is an empirical study of entry and exit in local telephone markets. It is in line with a large literature in industrial organization has analyzed the relationship between the degree of firm heterogeneity and the entry and exit pattern of an industry over time. Using a panel data set on the entry and exit of firms in the local telephone market in Pennsylvania from 1996 to 2003, I examines two sources of firm heterogeneity: the level of pre-entry experience of the firm and whether the firm owns or rents its capital equipment. In particular, this research studies how differences in firms prior to their entry affects their subsequent performance in the local telephone market. First, the firms renting its capital equipment (“reseller”) are found to consist of a higher percentage of experienced firms than the firms owning its equipment (“facilities-based”). Second, the firms with many years of related-business experience pre-entry (“experienced”) have lower turnover rates than the firms with very few or zero years of experience (“inexperienced”), and this difference is not observed in the group comparison between “reseller” and “facilities-based”. Lastly, the early cohort of “inexperienced” firms is more likely to survive longer than the later cohort; yet, this is not true of “experienced” firms. These findings indicate that heterogeneous firms choose a different entry or exit path to lower the total costs of large amount of investment when they make entry decisions into the local telephone market.
With a market-level panel data, I investigate the broadband diffusion among cable systems, a type of facility-based broadband provider, and examines how competition policy affects the diffusion pattern across over nine states in the U.S. during the period from 2000 to 2005. Two stages of broadband investment are distinguished, namely the decision to upgrade a currently one-way system into a two-way system and the subsequent decision to offer digital products. The second chapter also examines the role of competition, regulation and other demand and cost factors in both decisions. Empirical evidence shows that economies of scale and economies of scope both encourage the large cable system to upgrade its network infrastructure and offer more advanced broadband digital services. The digital video service competition and the high-speed Internet access service competition are found to have different influences on the cable systems' upgrading and diversification decisions. In addition, the local regulatory environment also affects the cable system's upgrading decision.
I observe a substantial percentage of cable systems initially offering only one kind of broadband digital services, after making a large amount of investment in upgrading their one-way cable system, and then adding the other broadband digital service a few years later. This observation of sequential diversification suggests that the differences in entry costs along different entry paths may exist. Given the panel length of only six years, the multinomial logistic model cannot capture the dynamic impact of different sunk entry costs in the broadband market to provide a valid explanation for such an observation. In the last chapter, I build a dynamic structural model of individual cable operators' decisions to diversify into offering broadband digital services such as high-speed Internet access and digital cable television when their cable systems have been upgraded already. I estimate a dynamic programming model of these investment decisions and quantify how ownership, local market characteristics, economies of scope, economies of scale and sunk costs in this industry together impact firms' investment decisions, by affecting the discounted expected profits of different choices. I find that the entry costs and unobserved fixed costs of offering different broadband digital services significantly affect cable operators' entry decisions. The entry cost for offering two digital services simultaneously is substantially greater than the cost of offering only one digital service as well as the sum of entry costs when sequential diversification is undertaken. In addition, I find that the probability of offering digital service rises with local market revenue for basic cable services, and economies of scope and economies of scale encourage cable operators to eventually diversify into offering two digital services. (Abstract shortened by UMI.)
0708: Mass communications