Economies of scale and density in local telephone networks

Abstract

The production structure of local telephone networks is analyzed with a translog cost function estimated with cross-sectional data on a sample of 44 small local exchange companies (LECs). The output vector includes the number of stations served and the service territory area. Economies of scale are exhausted beyond 992 stations with growth through territorial expansion. The threshold for expansion through densification is 51,053 stations. These results suggest that the optimal LEC's size is small, and that competition may be the most efficient form of production organization for medium to large markets in rural and low-density urban settings.