Implications for Local Exchange Competition

Our model describes conditions in which collusive behavior in a local exchange market is likely to occur, even though the firms are in fact competitors. The model tests the interactions of two firms with different cost bases. We also try the model on 14 service areas in which the social demographic y intercept for all 14 areas reflect a strong demand for telephone access. We can conclude for the studied areas that collusive behavior could occur but the tested conditions are very strict. Under smaller discount factors the reversion length T must grow larger to find collusive outcomes and in some cases there is no collusive outcome. We did not report on the smallest reversion lengths (T) to produce collusive response outputs for each area, but we reported on the Pareto optimal or quasi-optimal optimal 4-tuple trigger strategies.

We report that most of the areas had a Pareto optimal grim strategy. However, does the grim strategy imply that one firm would lose money and therefore exit the market? In other words, is competition sustainable in this model? In our studied areas, we conclude by saying, it seems unlikely that one firm would exit the market.

• First, a grim strategy implies that in order to sustain the collusive price, providers must punish forever. In other words, once cheating occurs the player can never return to the cooperative state.
• This further implies that collusion is not likely to be sustained in that market.
• If the only other price the providers can obtain is the Cournot price (in a quantity game), then for the given case we must see if the obtained (Cournot) price is greater than average cost. So, as in any case, it depends on the relationship between the demand curve and the average cost curve.
• Because this says nothing of long run average costs we say, the Cournot price must exceed the long run average costs to earn an economic profit and insure the continued existance of the firm.
• In this market average cost from the total cost functions is downward sloping and approaching a constant. So, we say average costs approach marginal costs in the long run. A price above marginal cost, in this study would insure the price above long run average costs, and the firms would not go out of business by not colluding. They would just earn lower economic profits.

More importantly, however, this study demonstrates the percentage of households that would receive local exchange access under market conditions is well below expected penetration rates for universal access. Along with these results, the price for access would also be much higher than typical local access tariffs in the U.S. These results indicate that market intervention to promote higher penetration rates in local access markets with similar characteristics of limited competition would clearly be beneficial to consumers.