PRODUCT SUBSTITUTABILITY AND COMPETITION IN LONG-DISTANCE TELECOMMUNICATIONS

I estimate the degree of substitutability between U.S. long-distance telecommunications carriers. AT&T's Marshallian demand elasticity for basic long-distance service is estimated to be about –10. With various assumptions regarding producer behavior, a range of residual demand elasticities, price-cost margins, and the dead-weight losses are calculated. I argue that producer behavior is such that the dead-weight loss to supracompetitive pricing is likely to be about 1.5% of industry revenues. The results bear on whether AT&T's deregulation was merited and whether to allow the Bell Operating Companies to enter the long-distance market. ( JEL L13, L96, C30)