The article focuses on the relation of competition to changes in productivi
ty. Specifically, it compares the experience of AT&T Long Lines, operating
in an increasingly competitive market, with that of eight local telephone m
onopolies. Both the estimation of total factor productivity growth and the
analysis of shifts in cost functions show a markedly faster change in effic
iency in the effectively competitive market than for the local monopolies.
The article also examines three channels through which competition produces
differential changes in efficiency. The results support, by implication, a
policy of permitting entry and increasing competition in local telephone m
arkets. (JEL L11, L96).