Intermodal competition and a slowdown in the productivity growth of US local exchange carriers

Despite of the introduction of incentive regulations and competition, the US incumbent local exchange carriers (ILECs) have suffered from a substantial slowdown in productivity growth in the first decade of the 21st century. This study evaluates the effects of incentive regulations and competition on changes in the total factor productivity (TFP) of the ILECs and, more importantly, attempts to determine the key sources for the slowdown in TFP growth. An empirical analysis was conducted with panel data of 38 ILECs for the period 1991-2007. The results show that both competition and incentive regulation resulted in an industry-wide technical change, but did not induce carrier-specific TFP growth. Additionally, the results show that intermodal competition from mobile services exerted a detrimental effect on the performance of ILECs through its impacts on demand for fixed telephone services.