Market liberalization and the psychology of firm performance

In this paper we study whether the progressive liberalization of the U.S. telecommunications industry has altered the psychology of firms’ behavior and led to performance changes. A detailed theoretical framework is developed, based on extension of the postulates of x-efficiency theory. Such an extension of x-efficiency theory enables us to make predictions regarding the direction of performance changes and whether among the various measures of performance there are likely to be cross-sectional differences, even as these different measures change over time. Two performance measures are computed. The first measures the ability of firms to maximize revenues, given their resources; the second measures their ability to reduce costs given the level of outputs generated. We find that market liberalization has significantly impacted the internal psychology within firms, in encouraging both entrepreneurially-oriented and productivity-oriented behavior. However, over time as the market gets more and more liberalized it is the entrepreneurially-oriented behavior that is dominant. We also examine whether ownership differences cause divergences among the firms studied in behavior and performance. We find that erstwhile AT&T-owned firms are always superior to independents in revenue-maximizing skills, but in an era of monopoly were not cost minimizers. In a liberalized environment their cost minimization skills are also superior to the independent firms. * E-mail: [email protected]; Tel.: + 1 313 763 4610; Fax: + 1 313 763 5688. 0167-4870/94/$07.00