The Effects of Bargain Wholesale Prices on Local Telephone Competition:

The Effects of Bargain Wholesale Prices on Local Telephone Competition:

Does Helping Competitors Help Consumers?
June 16, 2003

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This paper investigates the effects of regulations that require incumbent local exchange carriers (ILECs) to lease their network (referred to as “unbundled network elements” or UNEs) to competitive local exchange carriers (CLECs) at very low prices.  While intended to stimulate competition for local telephone services and speed competitive benefits to consumers, low UNE and UNE-P wholesale prices appear to discourage industry investment and reduce consumer choice and benefits.  The major findings of this paper include

  • CLECs are abandoning their own networks to lease UNEs at bargain prices.  In other words, the recent increase in leased lines is coming at the expense of lines built and owned by CLECs themselves. 
  • UNE prices are set so low they approach predatory prices, prices that discourage CLECs from investing in alternative telecommunications infrastructure.  These low UNE prices make the ILECs’ wholesale services unprofitable, which discourages continued ILEC investment.  As a direct result of low wholesale prices, industry-wide telecommunications investment has fallen 40% over the last two years. 
  • Public policies that impede telecommunications investment harm the economy.   This study finds that the fall in telecommunications investment results in an annual decline in economic output equivalent to $101 per average household annually.  In contrast, the benefits of price reductions resulting from local competition are estimated to be $11.41 per household annually.  Thus, this study finds that the economic costs associated with setting artificially low wholesale prices far outstrip the consumer financial benefits. 

In summary, if low UNE and UNE-P wholesale prices were intended to save consumers money, they have been a dismal failure.  CLECs are now abandoning their investments and riding on the same network that consumers always had available to them.  Because UNE-P regulations are usurping market forces and harming facility-based CLECs and ILECs, these regulations have created more harm than good for consumers.  Therefore, regulators should reevaluate current policies and promote new policies that encourage facility investment instead of freeloading.