Proper Quadratic Cost Functions with an Application to the Bell System

Lars-Hendrik Roller

The Review of Economics and Statistics, 1990, vol. 72, issue 2, 202-10

Abstract: When choosing a flexible functional form to model multioutput cost structures, one is quickly confronted with severe violations of certain regularity conditions over large regions of output space. This paper explicitly imposes regional properness on the parameter space of flexible functional forms. The apparent trade-off between functional flexibility and functional properness has been identified for the case of the quadratic cost function. Using the quadratic cost function, the proposed procedure is illustrated with an application to the Bell System. The results suggest that the telecommunication industry in the United States--prior to the Bell System break-up--was a natural monopoly. Copyright 1990 by MIT Press.

Date: 1990
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