Measuring TFP for an Expanding Telecommunications Network
Typically, multiple-output econometric models of Australian telecommunications production maintain an assumption that carriers are in long-run equilibrium (Bloch et al. 2001a; Bloch et al. 2001b; Madden et al. 2002). This assumption implies all factors of production are adjusted in a costless manner to determine carrier longrun factor demands instantaneously (Nadiri and Prucha 1999). It has long been recognized that this assumption is problematic if carriers incur adjustment costs in altering their capital stock. Internal adjustment costs are commonly characterized in the form of output foregone due to quasi-fixed factor changes (Nadiri and Prucha 1990). Also, short-run network expansion costs (that relate to the addition of quasi-fixed network capital) vary with subscriber density, e.g., extending service to remote areas is more costly than upgrading the metropolitan local-loop network. Productivity growth is an important indicator of the nature of production technology, and is related to changes in cost as technology change occurs. Accurate measurement is important as productivity growth is often employed to evaluate past and forecast future performance of monopoly carriers, and the effect on industry performance of the introduction of competition (Fuss 1994). Further, conventional measures of total factor productivity (TFP) assume both constant returns to scale and full static equilibrium, and they are biased measures when either of these conditions is violated (Schankerman and Nadiri 1986).
KeywordsTotal Factor Productivity Telephone Service Elasticity Estimate Network Expansion Technological Regime
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