APPLIED MICRO: Policy Deterrence-Policy Deterrence: Strategic Investment in U.S. Broadband; Professor Mo Xiao (The University of Arizona)

Abstract

This paper provides both theory and empirical evidence that firms act strategically to preempt government policies that promote entry and competition in the context of U.S. broadband investment. In our model, a leading firm’s investments can reduce the political appeal of procompetitive policies, which then thwarts a following firm’s investment. We show the relevance of this model using data on local broadband investment and the political environment, as well as state-level financial and regulatory broadband policies. We first document a robust empirical pattern that leading firms’ investments are politically motivated: they tend to invest more in electorally competitive counties, all else equal. This pattern is not observed for small firms, who tend to benefit from procompetitive policies. We also document that fewer state broadband policies are enacted in response to an increase in broadband capacity, especially in electorally competitive counties. We then discuss the implications of leading firms’ investment to reduce competition, both directly and indirectly through policy deterrence.

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