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DUAH AMPONSAH ISAAC

DUAH AMPONSAH ISAAC. PRESENTATION ON ON “UNNATURAL MONOPOLIES IN LOCAL TELEPHONE” Richard T. Shin and John S. Ying. Background information. FOCAL POINTS. Telephone industry is not a natural monopoly .

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DUAH AMPONSAH ISAAC

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  1. DUAH AMPONSAH ISAAC PRESENTATION ON ON “UNNATURAL MONOPOLIES IN LOCAL TELEPHONE” Richard T. Shin and John S. Ying

  2. Background information

  3. FOCAL POINTS • Telephone industry is not a natural monopoly. • Most of the test of natural monopoly of the telephone utility has been based on time series data on large companies like bell Canada and AT&T. • Different methods to control for technological changes but produced inconsistent results.

  4. Data problems of previous studies • Aggregated time series data: limited degrees of freedom and possible specification errors; bias scale economies elasticity estimates . • Improper modeling of technology . • Output is derived by dividing total revenue by average prices and tolls of services-inadequate!

  5. WHATS NEW ? • Data(58 lecs and 464 observations): pooled crossectional sample of 58 LECs from 1976 to 1983 overcomes the technology modeling problems since it’s a panel data. And also translog cost function is adopted for its flexibility output variable base on access lines and the number of calls. • APPROACH: 22 BOCs were integral part of the operations of At&t, if there is no evidence that the LECs are natural monopolies, then the possibility of AT&T being a natural monopoly is remote justifies divestiture. • RELEVANCE: policy advice on promoting competition in the LECs mktcan be based on this study.

  6. Cost model • To determine the technological structure of telephone of lec, multiproduct cost function is adopted. • C = C(w, y, a, b, t) • W= a vector of factor prices • Vector of output • a-= vector of operating characteristics which includes central offices, average length of loop and % of access lines that are electronic(proxy of technology) • b-= is an indicator variable of the baby bell; a dummy. • Time trends account for possible unmeasured dynamic changes in technological progress. • Output consist of three variables: number of access lines, local calls and toll calls.

  7. Estimation Results • EA have a negative impact on cost but an interaction with b changes the sign to positive. • B has positive and significant cost elasticity; BOCs have higher cost than the other non-BOC LEC. • T has negative cost elasticity but more significant with the interaction with B.

  8. SUBADDITIVITY TEST • The three output variables has positive, slightly < 1 scale elasticity showing mild economies of scale.(0.9580) • Cost subadditvity? • Local Subadditivity test show cost subadd. • Global Test shows none.

  9. conclusion • Doubtful that the bell system was a natural monopoly . • LECs may have monopolies in their local markets but economically they are not classical case of natural monopoly -breaking them up produce cost savings for society; competition must be promoted.

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