DSL, Demand, Universal broadband, Universal service, Intercarrier compensation reform, Rural America, Elasticity, Video, L51, L96,

Empirical cost models for wireline broadband circuits are used to test whether economies of scale exist in rural areas and whether new Ethernet technology lowers the unit cost of broadband transportation. Previous studies have shown small or nonexistent economies of scale for wireless technology. Results from earlier studies also demonstrated economies of scale for voice-only wireline networks which diminished with network size and were fully exploited for large networks. To our knowledge presence of economies of scale for wireline broadband networks has not been tested, certainly not in rural United States. We use data supplied by more than 500 rural local exchange carriers and find economies of scale for small rural wireline broadband providers. Market size limitations appear to prevent rural telephone companies from fully exploiting unit cost savings. The data also show increasing capacity over existing broadband connections is subject to substantial economies of scale, but such economies diminish quickly as bandwidth capacity increases. The data do not support the hypothesis that Ethernet technology reduces broadband transmission cost.

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