THE ROLE OF DIFFERENTIATION STRATEGY IN LOCAL TELECOMMUNICATION ENTRY AND MARKET EVOLUTION: 1999?2002

SHANE GREENSTEIN, MICHAEL MAZZEO
2006 Journal of Industrial Economics  
We examine the role of differentiation strategies with regards to entry behavior and the evolution of the telecommunications market. Our study is distinctly different from prior literature, which has used models of interaction among homogenous firms to analyze local telecommunication competition. We construct a detailed data set of Competitive Local Exchange Carriers' (CLECs) market structure in nearly 1,200 U.S. cities in 1999 and 2002, before and after a valuation crash affecting firms in
more » ... industry. We exploit recent developments in the analysis of entry and competition among differentiated firms to test and reject the null hypothesis of homogeneous competitors. We also find strong evidence that differentiated CLECs account for both potential market demand and the business strategies of competitors when making their entry decisions. Finally, the degree of product heterogeneity in markets as of 1999 helps predict how the structure of markets evolved through 2002. These findings suggest that firms' incentives to differentiate CLEC services should contribute to the policy debate for regulation of local telecommunications.
doi:10.1111/j.1467-6451.2006.00291.x fatcat:jdoy6ekwqvadtlbcvkilmj2nmq