Forecasting competitive entry. The case of bypass adoption in telecommunications

The transition to competition in the U.S. telecommunications industry has been fostered under an asymmetric regulatory structure. As a result, the local exchange carriers are required to levy access charges on the inter-exchange carriers for the local distribution of long distance messages at rates significantly in excess of underlying economic costs. This rate-cost disparity has incented the inter-exchange carriers to selectively circumvent the local exchange carriers local distribution facilities and interconnect directly with their large and medium-sized business customers. This phenomenon is commonly known as bypass. This study estimates the timing of bypass adoption by establishing a relationship between bypass adoption and competitive entry in the long distance market. Specifically, the study maintains that, from the end-users’ perspective, bypass appears as discounted long distance service. Hence, it is possible to analyze AT&T’s loss of marketshare to competitors over time and infer a similar market response with regard to bypass. In other words, if AT&T market share erosion can be explained principally by the difference between AT&T and its competitor’s toll rates, it should be possible to explain bypass adoption by the difference between what customers pay for switched access and what they would pay for bypass. Utilizing this approach, a model is developed that can be used to gauge the adoption rate of bypass. The model forecasts that bypass adoption would reach nearly 19% of switched access revenues by 1990. The evidence presented in this study clearly attests to the need to move to cost-based pricing of LEC services as rapidly as possible.