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Nonparametric Analysis of Cost Complementarities in the Telecommunications Industry

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  • Beresteanu, Arie

Abstract

The market structure of the telephone industry has been the focus of much empirical research following the divestiture of AT&T in 1984. Using data on Local Exchange Carriers (LECs), I estimate the total cost function of LECs operating between 1988 and 1995. First, I show that cost complementarities can be nonparametrically identified in many situations where economies of scope and subadditivity - the focus of previous empirical research - cannot be identified. Next, I implement a feasible estimation model that is consistent with the properties that a cost function needs to satisfy according to economic theory. The telephone companies are treated as multi-product firms producing two outputs: local and toll calls. The results support the assumption of cost complementarities in the production of both outputs. The degree of complementarity is computed and shown to be larger for small companies.

Suggested Citation

  • Beresteanu, Arie, 2002. "Nonparametric Analysis of Cost Complementarities in the Telecommunications Industry," Working Papers 02-07, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:02-07
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    Cited by:

    1. Chavas, Jean-Paul & Kim, Kwansoo, 2010. "Economies of diversification: A generalization and decomposition of economies of scope," International Journal of Production Economics, Elsevier, vol. 126(2), pages 229-235, August.
    2. Edmond Baranes & Cuong Hung Vuong, 2020. "Investment in Quality Upgrade and Regulation of the Internet," CESifo Working Paper Series 8074, CESifo.
    3. Natalia Lazzati & John K.-H. Quah & Koji Shirai, 2018. "Nonparametric analysis of monotone choice," Discussion Paper Series 184, School of Economics, Kwansei Gakuin University.
    4. Dennis Epple & Brett Gordon & Holger Sieg, 2010. "A New Approach to Estimating the Production Function for Housing," American Economic Review, American Economic Association, vol. 100(3), pages 905-924, June.
    5. Kwansoo Kim & Donghwan An, 2015. "Nonparametric Evaluation of Economies of Scope in the Context of Technical Efficiency: The Case of Rice and Vegetable Farms in Korea," Asian Economic Journal, East Asian Economic Association, vol. 29(3), pages 285-301, September.

    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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