CRTP-2

Estimates of Most Productive Scale Size in the U.S. Telecommunications Industry

R.D. Banker, H.H. Chang, and S.K. Majumdar
December 1994

This paper reports an analysis of most productive scale size and the patterns of 
returns to scale for the local exchange companies in the U.S. telecommunications 
industry for the time-periods 1984 and 1990. Most productive scale size 
(MPSS) and returns to scale estimates are calculated applying Data Envelopment 
Analysis (DEA). The results indicate that increasing returns to scale prevail and 
that this is an important, but not dominant, characteristic of firms in the local 
exchange sector. Segmenting the data, we find that the independent (non-Bell) 
operating companies primarily display increasing returns to scale, while the Baby 
Bell operating companies primarily display either constant or decreasing returns 
to scale. Equivalently, the non-Bell companies operate at a scale smaller than 
their MPSS, while the Bell operating companies operate at a scale greater than 
their MPSS. Our evidence suggests that efficiencies might be gained by industry 
restructuring in the local exchange sector, by allowing independents to expand 
their size of operations while the existing Baby Bell operating companies may be 
restructured or downsized to create smaller operating units.