COMPETITION AND ALLOCATIVE EFFICIENCY - THE CASE OF THE UNITED-STATESTELEPHONE INDUSTRY

This study investigates the effect of competition on the productive ef ficiency of the U.S. telephone industry, taking into account the fact that the industry was subject to rate-of-return regulation. It is show n that competition induces the incumbents to use capital inputs closer to the unconstrained optima, thereby reducing the allocative ineffici ency caused by the Averch-Johnson effect. This effect is in addition t o the usual technical efficiency improvement induced by competition. E mpirical results, based on annual data for the U.S. telephone industry for the 1951-90 period, suggested that competition improved the alloc ative efficiency of the incumbent firms which had been under a rate-of -return regulation until 1989.