Geography and the costs of local telephone networks

This paper expands past research on the cost structure of local telephone networks by considering the cost effects of geographical factors, such as service territory size, land uses, street patterns, population density, soil types, slopes, and the spatial partitioning of a company into local exchanges. A translog cost function is estimated using data on 41 telephone companies operating within the New York State, together with GIS-derived geographical data. The results confirm the importance of geography as a determinant of local telephone costs, and suggest that earlier estimates of size thresholds between economies and diseconomies of scale may be too low. The trade-offs between geographical factors in shaping the frontier between economies and diseconomies of scale are assessed. The implication for public policy on competition at the local level is that natural monopoly may be more prevalent than previously assumed.