The Flow Through of Cost Changes in Competitive Telecommunications: Theory and Evidence

Abstract

Flow through refers to the effect of a change in incremental production costs on the prices of goods or services, and is a topic of great interest to regulators and others. This article provides a framework for both analyzing flow through, and for evaluating whether or not flow through, properly defined, occurs in the long distance telecommunications industry. We focus on the effects of changes in switched access charges on domestic long distance prices for the largest U.S. long distance carriers in the late 1990s. Utilizing a double bootstrap technique uniquely suited to this problem, we find flow through occurred over the sample period. The technique illustrated here may find useful applications in other regulated sectors.

Keywords: Flow Through, Competition, Telecommunications, Cost Changes, Long Distance

JEL Classification: L96