Assessing the Effectiveness of Section 271 Five Years After the Telecommunications Act of 1996

TL;DR

This paper evaluates the effectiveness of section 271 of the Telecommunications Act of 1996 in promoting competition, analyzing regulatory mechanisms, industry characteristics, and empirical data five years after enactment.

Contribution

It provides a theoretical and empirical analysis of section 271's incentive mechanisms and assesses its impact on local and long-distance market competition.

Findings

Section 271 has been effective in ensuring BOC compliance.

Using a prize mechanism like long distance entry is a superior incentive.

Regulatory constraints limit observation but incentives align with competition goals.

Abstract

A major goal of the Telecommunications Act of 1996 is to promote competition in both the local exchange and long distance wireline markets. In section 271 Congress permitted the Bell Operating Companies (BOCs) to enter the long distance market only if they demonstrate to the FCC that they have complied with the market-opening requirements of section 251. This paper examines the logic behind section 271, to determine if it is a reasonable means of achieving increased competition in both the local and long distance markets, given the technical characteristics of the industry and the legal and informational constraints on regulators who must ensure compliance. It also provides an update on the extent of competitive entry in the local exchange market five years after enactment of the Act. In this paper we examine a variety of schemes for ensuring BOC compliance that Congress could have used. Given the characteristics of the industry and the limitations on regulators' ability to observe BOC's efforts, we determine that the use of a prize such as BOC entry into long distance is a superior incentive mechanism. We further determine that conditioning a BOC's long distance entry on its demonstrating compliance with section 251 is a logical method of protecting the long distance market against a BOC discriminating against long distance competitors once it has gained entry. The statistical evidence we look at, using data we have collected on ILEC lines sold to CLECs for POTS services, appears to confirm that section 271 has thus far been effective in ensuring compliance.