This paper overcomes the long-standing problem of measuring motor carriers' service quality by utilizing service quality data collected from shippers. A service quality controlled cost function is estimated for a sample of less-than-truckload motor carriers. It is shown that excluding service quality variables from cost estimation significantly underestimates carriers' scale economies. These scale economies enable large carriers to offer higher quality services at competitive or even lower costs than small carriers. Copyright 1995 by MIT Press.