Technology, efficiency and sustainability of competition in the Indian telecommunications sector

Abstract

Liberalisation of the Indian telecommunications services started in mid nineties with no change in the existing public monopoly structure, viz., Department of Telecommunications (DoT). In order to evaluate any proposed industry structure, it is essential to analyse the production technology of DoT so as to determine the rationale of liberalisation and sustainability of competition. Accordingly, this paper estimates a frontier multi-product translog cost function for DoT, where the cost function has been duly modified to account for the production technology of a public monopoly. The study finds that although DoT displays high allocational inefficiency, it is still a natural monopoly with very high degree of subadditivity of cost of production. This implies that the choice of any reform policy should consider the trade-off between the loss of scale and scope economies and cost saving from the reduction in inefficiency of the incumbent monopoly in the event of competition.