Loop density and telephone company cost: Panel data evidence

The assumption that telephone company loop costs are determined significantly by loop density has been a bedrock assumption relied on in the development and implementation of several telecommunications programs including federal and state universal service programs. Increasingly telecommunications program development and implementation have focused on this relationship to the exclusion of all others. This article examines embedded loop cost data from a panel of Illinois telephone companies in order to examine the relationship between the costs that these companies report incurring and their respective loop densities. The analysis turns up little evidence that density is the sole driver of embedded costs.