Abstract
This study investigates the effect of competition on the productive efficiency of the U.S. telephone industry, taking into account the fact that the industry was subject to rate-of-return regulation. It is shown that competition induces the incumbents to use capital inputs closer to the unconstrained optima, thereby reducing the allocative inefficiency caused by the Averch-Johnson effect. This effect is in addition to the usual technical efficiency improvement induced by competition. Empirical results, based on annual data for the U.S. telephone industry for the 1951-90 period, suggested that competition improved the allocative efficiency of the incumbent firms which had been under a rate-of-return regulation until 1989. Copyright 1995 by MIT Press.
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