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Competition and Allocative Efficiency: The Case of the U.S. Telephone Industry

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  • Oum, Tae Hoon
  • Zhang, Yimin
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    Abstract

    This study investigates the effect of competition on the productive efficiency of the U.S. telephone industry, taking into account the fact that the industry was subject to rate-of-return regulation. It is shown that competition induces the incumbents to use capital inputs closer to the unconstrained optima, thereby reducing the allocative inefficiency caused by the Averch-Johnson effect. This effect is in addition to the usual technical efficiency improvement induced by competition. Empirical results, based on annual data for the U.S. telephone industry for the 1951-90 period, suggested that competition improved the allocative efficiency of the incumbent firms which had been under a rate-of-return regulation until 1989. Copyright 1995 by MIT Press.

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    Bibliographic Info

    Article provided by MIT Press in its journal Review of Economics & Statistics.

    Volume (Year): 77 (1995)
    Issue (Month): 1 (February)
    Pages: 82-96

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    Handle: RePEc:tpr:restat:v:77:y:1995:i:1:p:82-96

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    Web page: http://mitpress.mit.edu/journals/

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    Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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    Cited by:
    1. Oleg Badunenko & Michael Fritsch & Andreas Stephan, 2006. "Allocative Efficiency Measurement Revisited: Do We Really Need Input Prices?," Discussion Papers of DIW Berlin, DIW Berlin, German Institute for Economic Research 591, DIW Berlin, German Institute for Economic Research.
    2. Wilson, Wesley W. & Zhou, Yimin, 2001. "Telecommunications deregulation and subadditive costs: Are local telephone monopolies unnatural?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(6), pages 909-930, May.
    3. Gary Madden & Scott J. Savage & Jason Ng, 2003. "Asia-Pacific Telecommunications Liberalisation and Productivity Performance," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 42(1), pages 91-102, 03.
    4. Peilei Fan, 2011. "Innovation capacity and economic development: China and India," Economic Change and Restructuring, Springer, Springer, vol. 44(1), pages 49-73, April.
    5. Bouras, Hela & Fekih, Bouthaina Soussi, 2013. "Quality institutional reform and economic performance: Case of telecommunications in the MENA region," MPRA Paper 55888, University Library of Munich, Germany.
    6. Balk, Bert M., 1997. "The decomposition of cost efficiency and the canonical form of cost function and cost share equations," Economics Letters, Elsevier, Elsevier, vol. 55(1), pages 45-51, August.
    7. Halkos, George & Tzeremes, Nickolaos, 2011. "A conditional full frontier approach for investigating the Averch-Johnson effect," MPRA Paper 35491, University Library of Munich, Germany.
    8. Nongluk Buranabunyut & James Peoples, 2012. "An empirical analysis of incentive regulation and the allocation of inputs in the US telecommunications industry," Journal of Regulatory Economics, Springer, Springer, vol. 41(2), pages 181-200, April.

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