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The consequences of evolving competition on the components of firms' profits: Recent evidence from the U.S. telecommunications industry

Information Economics and Policy
Publication Date
DOI: 10.1016/0167-6245(94)00026-3
  • Telecommunications Industry
  • Performance Evaluation
  • Communication
  • Economics


Abstract We undertake a study where we examine the impact that the continuing evolution of competition is having on the components of profitability of U.S. telecommunications firms. We evaluate dimensions of performance for almost the whole population of local operating companies for the years 1988, 1999, 1990 and 1991. The study extends prior evidence, generated for the years 1981, 1984 and 1987, about firms' performances in the same sector of the industry. Performance is measured using a multi-period, multi-output ratio analysis model which enables disaggregation of profitability into its various constituents. These ratios are productivity, price recovery, product mix and capacity utilization ratios, and capture the underlying behavioral predilections of firms. We find that over the period 1988 to 1991 overall profitability drops, unlike in the period 1981 to 1987 when it showed a rising trend. However, the year-by-year movement trends are not always significant. Productivity rises steadily and monotonically over this period. The rise in productivity has taken place at a higher rate in the 1988–1991 period than in the 1981–1987 period. The price recovery ratio declines, also monotonically. The rate of decline is similar in both periods. On the other hand, there are no significant movements in the product mix and capacity utilization ratios in the 1988–1991 period, unlike in the 1981–1987 period when both ratios rose steadily. Firm-level differences have also increased in the 1988–1991 period for the profitability and productivity change ratios. The overall results point to increasing competitive pressures in the U.S. telecommunications industry, as a result of which overall profitability is declining and firms cannot also recover higher margins by concentrating on profitable product mixes. The key to economic sustainability is productivity increase; however, even with respect to productivity improvements, the increased variation suggests that not all firms are adept in making these improvements.

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