COSTS, PRODUCTIVITY, AND FIRM HETEROGENEITY IN LOCAL TELEPHONE MARKETS

In the last few decades, the telecommunications industry has experienc ed dramatic technological change. However, since divestiture of AT&T, there have been only a few studies that estimate the effects of techno logical change. Using a cost function, we estimate these effects. Unli ke previous studies, we model unobserved heterogeneity in the error st ructure. We find strong evidence in favor of heterogeneity and that ac counting for heterogeneity provides estimated effects of technological change that are smaller and estimated scale effects that are larger t han those without controls for heterogeneity.