Competition and productivity growth: The case of the U.S. telephone industry

The article focuses on the relation of competition to changes in productivity. Specifically, it compares the experience of AT&T Long Lines, operating in an increasingly competitive market, with that of eight local telephone monopolies. Both the estimation of total factor productivity growth and the analysis of shifts in cost functions show a markedly faster change in efficiency in the effectively competitive market than for the local monopolies. The article also examines three channels through which competition produces differential changes in efficiency. The results support, by implication, a policy of permitting entry and increasing competition in local telephone markets.