We develop a dynamic oligopoly model of competition in local exchange markets to analyze the impacts that mandatory sharing of incumbent facilities has upon investment in telecommunications infrastructure. Our model is distinguished from other treatments of the relationship between unbundling and investment by capturing the microeconomic structure underlying strategic interaction of the various providers competing in these markets. We calibrate the structural parameters using market data and then use those values to simulate investment outcomes under alternative unbundling policies.

In the model, three types of providers supply both voice and data services in each geographic market using their own network facilities: an incumbent local exchange carrier (“ILEC”), a cable television company (“CATV”), and a facilities-based competitive local exchange carrier (“CLEC-F”). A fourth type of carrier, the “CLEC-L,” provides these services by leasing facilities from the ILEC at regulated wholesale rates. Each of the three facilities-based carriers chooses a level of capital investment to maximize the net present value of its cash flows. Capital obeys the conventional accumulation rule that assumes geometric depreciation. All four carriers compete in mass-market retail services by setting prices for their differentiated voice and data services. We employ the concept of a Markov-perfect equilibrium (MPE) to select the outcome of investment and price competition in discrete time over a finite horizon.

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