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 if "essential facilities" or related claim, a common concern is that the ability to "buy" inputs substantially attenuates the incentive to "make" inputs. In this paper, we evaluated both theoretically and empirically the relationship between "make" and "buy." In our particular construct, three sometimes-conflicting effects are relevant to the "make-or-buy" decision, 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. While particular to telecommunications, our findings do support the general notion that the substitution effect is not the only relevant consideration, either theoretical or empirical, for policy makers in selecting what inputs to make available to entrants when promoting competition in the utility industries