Service-based vs. facility-based competition in local access networks

In this paper we argue that service-based competition may deter (or delay) facility-based competition. Hence, to the extent that service-based and facility-based entry are perceived as substitute strategies by the entrants, regulatory policies that are aimed at each one of them may exhibit conflicts. We develop our arguments on the basis of our formal studies, Bourreau and Dogan (2002a,b), where an incumbent and an entrant compete for providing high-bandwidth services. We claim that an incumbent who faces an effective threat of facility-based competition can strategically delay facility-based entry by providing attractive terms of access to its facilities. The delay that is introduced by attractive terms of access is by virtue of a replacement effect, which may also affect the choice of technology to be eventually built by the entrant.