Review of Industrial Organization 14: 303–319, 1999. © 1999 Kluwer Academic Publishers. Printed in the Netherlands. 303 Open Entry and Local Telephone Rates: The Economics of IntraLATA Toll Competition DAVID L. KASERMAN ⋆ Department of Economics, Auburn University, 415 W. Magnolia, Auburn, AL 36849-5242 JOHN W. MAYO Georgetown University, School of Business, Old North Building , 37th & O Street, N.W., Washington, DC 20057 LARRY R. BLANK State of Nevada, Public Service Commission, Rates and Regulatory Analysis, 727 Fairview Drive, Carson City, NV 89710 SIMRAN K. KAHAI College of Business, Organization and Management, Tuskegee University, Tuskegee, AL 36088 Abstract. The Telecommunications Act of 1996 removes state-level legal and regulatory barriers to entry that previously have proscribed facilities-based interchange carriers from entering intraLATA toll markets. Traditionally, these markets have provided excess profits that local exchange companies ostensibly have used to subsidize local telephone rates. Elimination of these entry barriers, then, raises concern that the resulting intensification of competition will force unwanted local residential rate increases. In this paper, we critically examine the local-rate-increase question both theoretically and empirically. Our analysis finds no evidence that intraLATA toll competition will adversely affect local rates. Key words: Local telephone rates, intraLATA toll competition, entry, cross-subsidy ⋆ This paper has benefited from helpful comments by William Baumol, Bill Fox, Greg Harken- rider, John Jackson, Alfred Kahn, Jim MacDonald, David Mandy and participants in both the Auburn University Economics Department Workshop and the Journal of Regulatory Economics Editor’s Conference. We also acknowledge the very constructive comments provided by two anonymous referees. In addition, we gratefully acknowledge the research support of AT&T, especially the as- sistance of Nancy Gillespie, Joel Lubin, Jackie Miller, Les Sather, Garry Sharp, and Sydney Wagner. The views expressed in this paper are solely those of the authors, who remain responsible for any remaining errors.