Are Unbundled and Self-supplied Telecommunications Switching Substitutes? An Empirical Study

The Telecommunications Act of 1996 requires incumbent monopoly phone companies to lease elements of their networks to rivals. An important policy question is whether these unbundled elements are substitutes for entry modes that are more facilities-based. In this article, we estimate demand curves for unbundled elements with the goal of assessing cross-price effects between two of the more popular entry modes that differ in the mix of unbundled and self-supplied inputs. As expected, we find downward sloping demand curves for unbundled elements. We also find own-price elasticities in the elastic region of demand. What we do not find is evidence of substitution; we are able to reject the hypothesis of effective substitution between the two entry modes.