Cost structure and complementarity in U.S. Telecommunications, 1989-1999

A multi-product cost model is estimated on a panel of U.S. local exchange carriers from the period 1989-1999. The model allows specification of cost inefficiency to avoid potential bias in the estimates. Unlike earlier research, the paper experiments with several proxies of the carriers' access provision. The results show slight economies of scale and density with moderate cost increments due to allocative inefficiency. Between the network access provision and call services, there are anti-complementarities in costs. The latter finding, joined with confirmation from cost elasticity estimates that the bottleneck of the technology is network access, might question the efficiency of vertical integration.