An examination of the equilibrium specification and structure of production for canadian telecommunications

Multiple-output models of Canadian telecommunications production are estimated under different production equilibria. A specification test is conducted between the short- and long-run equilibrium models and the long-run equilibrium is rejected. In order to capture the nature of the disequilibrium, a dynamic cost of adjustment model is estimated for Bell Canada. There are significant adjustment costs and it is estimated that for $1.00 of marginal capital costs the carrier must incur an additional cost of $0.30 to install the new capital into the production process. Returns to scale, cost complementarity, productivity growth and price elasticities are estimated from the dynamic cost of adjustment model. The average annual productivity growth rate is estimated to be 1.32, which is consistent with estimates from static long-run equilibrium models. There are significant economies of scale, with returns to scale estimated to be 1.50, but there are no cost complementaries. Scale economies appear to be robust across different equilibria, and are due to the relatively small effect that toll output exerts on variable cost.