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A market test for natural monopoly in local exchange

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Abstract

Is the incumbent local exchange carrier (LEC) a natural monopolist? The analysis indicates that the LEC cost function is not supportable: LECs appear to be either nonsustainable natural monopolies or non natural monopolies over the set of services they currently offer. However, recent technological changes suggest that whether LECs are natural monopolies over their current offerings is immaterial for policy making, because competitors are enjoying economies of scope in offering both LEC and non LEC services. Based on these results, deregulation of LECs is discussed in a Type I/Type II error framework.

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Authors and Affiliations

  1. Department of Economics, University of Florida, 32611, Gainesville, Florida

    Sanford V. Berg

  2. Department of Economics and Finance, University of Wyoming, 82071, Laramie, Wyoming

    John Tschirhart

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  1. Sanford V. Berg
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  2. John Tschirhart
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Additional information

The authors are Professors of Economics at the University of Florida and the University of Wyoming. We are very grateful to Curtis Cramer, Joseph Dwyer, Richard Cabe, David Sappington, Gregory Sidak, and two anonymous referees for comments on this work. Errors of omission and commission reside with us alone. Our conclusions do not necessarily reflect the views of the sponsors of the Public Utility Research Center (PURC, Florida) or the Public Utility Research and Training Institute (PURTI, Wyoming). This paper was presented at the Southern Economic Association meeting, November 1994, and at a PURTI Academic Conference sponsored by US WEST, May 1994.

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Berg, S.V., Tschirhart, J. A market test for natural monopoly in local exchange. J Regul Econ 8, 103–124 (1995). https://doi.org/10.1007/BF01072585

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