Competition and Asymmetric Regulation in Long-Distance Telecommunications: an Assessment of the Evidence
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COMPETITION AND ASYMMETRIC REGULATION IN LONG-DISTANCE TELECOMMUNICATIONS: AN ASSESSMENT OF THE EVIDENCE David L. Kaserman* and John W. Mayo** TABLE OF CONTENTS I. In tro d u ctio n . II. The Economic Rationale for Traditional Regulation and the Criteria for Relaxed Regulation... III. Application of the Competitive Criteria to the Interexchange Services Market ................ IV. Competition in the Interexchange Market: Other Empirical Evidence ...................... A. Relaxed Regulation: The State Evidence .......................................... B. Relaxed Regulation: Business Services ............................................ C. Direct Econometric Estimates of AT&T's Market Power ............................ V . O ther Com petitive/Policy Issues ..................................................... A . T he T acit C ollusion Issue ...................................................... B . P redatory P ricing ............................................................. C. Low Volum e/Rural Custom ers .................................................. V I. C o n clu sio n . I. INTRODUCTION tory authorities. As the number of interexchange carriers grew, however, the question of whether and Prior to the entry of MCI into the long-distance how these new entrants into the long-distance mar- market in 1969, AT&T supplied virtually all long- ket should be regulated arose. In 1980, in the Com- distance calling in the United States, as well as the petitive Carrier Proceeding,' the Federal Communi- predominant share of local exchange services. Ac- cations Commission ("FCC" or "Commission") cordingly, AT&T was subjected to traditional mo- resolved the issue by adopting a policy which classi- nopoly regulation by both federal and state regula- fied firms according to their ability to adversely af- * Torchmark Professor of Economics, Auburn University. remanded, MCI Telecommunications Corp. v. FCC, 765 F.2d Ph.D., Economics, University of Florida, 1976. 1186 (D.C. Cir. 1985) [hereinafter Competitive Carrier Pro- ** Professor of Economics, University of Tennessee, Ph.D., ceeding]. AT&T filed a motion in this docket to have its classifi- Economics, Washington University, 1982. An earlier version of cation changed from a dominant carrier to a non-dominant car- this article was submitted by AT&T to the Federal Communica- rier. Motion for Reclassification of AT&T as a Nondominant tions Commission on June 12, 1995, as an ex parte presentation Carrier, in CC Dkt. No. 79-252 (Sept. 22, 1993); Ex Parte in CC Docket No. 79-252. Presentation in Support of AT&T's Motion for Reclassification 1 In re Policy and Rules Concerning Rates for Competitive as a Non-Dominant Carrier, in CC Dkt. No. 79-252 (Apr. 24, Carrier Services and Facilities Authorizations Therefor, Notice 1995) [hereinafter Ex Parte Presentation] (reasserting the mo- of Inquiry and Proposed Rulemaking, 77 F.C.C.2d 308 (1979); First Report and Order, 85 F.C.C.2d 1 (1980); Second Report tion). On October 12, 1995, the FCC decided that it would now and Order, 91 F.C.C.2d 59 (1982); Order on Recon., 93 treat AT&T as a nondominant carrier for regulatory purposes. F.C.C.2d 54 (1983); Policy Statement and Third Report and In re Motion of AT&T Corp. to be Reclassified as a Non-Dom- Order, 48 Fed. Reg. 46,791 (1983); Fourth Report and Order, inant Carrier, Order, in CC Dkt. No. 79-252, FCC 95-427 95 F.C.C.2d 554 (1983), vacated and remanded, AT&T v. (Oct. 23, 1995) [hereinafter AT&T Non-Dominant Order]. See FCC, 978 F.2d 727 (D.C. Cir. 1992), cert. denied, 113 S. Ct. also Doug Abrahms, FCC Frees AT&T from Some Restric- 3020 (1993); Fifth Report and Order,98 F.C.C.2d 1191 (1984); tions, WASH. TIMES, Oct. 13, 1995, at B8; Ruling Makes Phone Sixth Report and Order, 99 F.C.C.2d 1020 (1985), vacated and Rivalry Keener, S.F. EXAMINER, Oct. 13, 1995, at B-1. COMMLAW CONSPECTUS [Vol. 4 fect market prices.' Specifically, firms with signifi- capacity has shrunk to some forty to forty-five per- cant market power were to be classified as cent,6 while its share of interstate minutes-of-use has "dominant," while firms without such power were to fallen to fifty-eight percent. Indeed, MCI, Sprint be classified as "nondominant." Of particular impor- and LDDS/Wiltel now have sufficient capacity in tance, considerably more regulatory oversight and place to absorb thirty-two percent of AT&T's re- controls were imposed on any firms judged to be maining share of the market within three months.' "dominant."' The degree and intensity of rivalry among long-dis- When the FCC adopted this "dominant firm" sys- tance firms also has increased commensurate with tem of regulation, AT&T was one of a very small the growth of competitors in the long-distance mar- number of long-distance firms competing in the ket. In 1994, a typical American household received United States. It supplied over ninety percent of the some 330 advertising contacts from long-distance long-distance traffic, owned or operated nearly 100 companies.' The result of this heightened rivalry has percent of the transmission facilities used to carry been falling prices, improved quality, and an ever- long-distance calls, and enjoyed a unique dialing ad- expanding choice of innovative long-distance services. vantage over other long-distance competitors. Most Due to these changes in the long-distance market, importantly, in 1980, AT&T maintained control the FCC has reclassified AT&T as a nondominant over the local exchange bottleneck facilities through carrier. This reclassification, however, does not com- which virtually all long-distance calls pass. In light pletely eradicate asymmetric regulation. Though the of these market conditions, the FCC chose to classify FCC declared that it was not the determinative con- AT&T as a dominant firm and put in place a regu- sideration, AT&T has agreed to be bound by several latory apparatus designed to control the exercise of residual controls which do not apply to its competi- AT&T's perceived market power. tors.1" For example, AT&T will provide a fifteen Today's long-distance market is vastly different percent discount to low-income consumers for a pe- from that of fifteen years ago. The 1984 divestiture riod of three years." Other constraints were negoti- of the Bell operating companies eliminated AT&T's ated for low-volume residential customers and for control of local exchange bottleneck facilities.' 800 directory assistance service. 2 AT&T is also re- AT&T is now one of over 450 interexchange compa- quired to notify the Commission five days in advance nies vying for the patronage of long-distance custom- of residential rate increases above certain levels." In ers.' Moreover, as the number of competitors has addition, the Commission declined to extend the non- grown, AT&T's share of long-distance transmission dominant classification to AT&T's international ser- ' Competitive Carrier Proceeding, First Report and Order, MENT UPDATE, END OF YEAR 1993 (1994) [hereinafter FIBER supra note 1. DEPLOYMENT UPDATE]. ' The general policy of applying different regulatory con- 7 FCC, CC, INDUSTRY ANALYSIS DIv., LONG DISTANCE straints to firms competing within the same market is known as MARKET SHARES: FIRST QUARTER 1995 Tbl. 3 (1995) [herein- "asymmetric regulation" and has been the subject of some criti- after MARKET SHARES]. cism. See, e.g., FCC, OPP WORKING PAPER 14, IMPLICATIONS o T.L. Brand et al., An Updated Study of AT&T's Compet- OF ASYMMETRIC REGULATION FOR COMPETITION POLICY itors Capacity to Absorb Rapid Demand Growth, in Ex Parte ANALYSIS (authored by John R. Haring) (1984); David L. Presentation, supra note 1, Att. B. Kaserman & John W. Mayo, Market Based Regulation of a " Letter from C.L. Ward, AT&T, to William F. Caton, Quasi-Monopoly: A Transition Policy for Telecommunications, Acting Secretary, FCC, in CC Dkt. Nos. 79-252, 93-197, and 15 POL'Y STUD. J. 395 (1987). Asymmetric regulatory controls 80-286 (Mar. 9, 1995), in Ex Parte Presentation,supra note 1, over the "dominant" firm have continued until very recently, Att. S. even though traditional rate-of-return regulation of AT&T was 10 AT&T Non-Dominant Order, supra note 1, para. 37. replaced by price cap regulation in 1989. In re Policies and AT&T suggested these "voluntary" commitments in a series of Rules Concerning Rates for Dominant Carriers, Report and Or- ex parte letters to the Commission. See Letter from R. Gerard der and Second Further Notice, 4 FCC Rcd. 2873 (1989), re- Salemme, Vice President of Governmental Affairs, AT&T, to considered, 6 FCC Rcd. 665 (1991), remanded sub. nom. Kathleen M.H. Wallman, Chief, Common Carrier Bureau, AT&T v. FCC, 974 F.2d 1351 (D.C. Cir. 1992). Thus, the FCC, in CC Dkt. No. 79-252 (Sept. 21, 1995); Letter from R. change to price cap regulation did not signal an end to asymmet- Gerard Salemme, V.P.-Gov. Affairs, AT&T, to Kathleen M.H. ric regulation. Wallman, Chief, CC, FCC, in CC Dkt. No. 79-252 (Oct. 5, " See United States v. American Tel. & Tel. Corp., 552 F. 1995). Supp. 131 (D.D.C. 1982), aftd sub nom. Maryland v. United " AT&T Non-Dominant Order, supra note 1, para. 84. States, 460 U.S. 1001 (1983). Is For example, low-volume residential customers will have 1 FCC, CC, INDUSTRY ANALYSIS Div., TRENDS IN TELE- a guaranteed rate, set at three dollars per month for the first 20 PHONE SERVICE (1995) [hereinafter TELEPHONE TRENDS]. minutes of service during the first year. Id. para. 85. 1 FCC, CC, INDUSTRY ANALYSIS DIV., FIBER DEPLOY- is Id. para. 86. 19961 COMPETITION AND ASYMMETRIC REGULATION vices.14 Further, fifteen state regulatory commissions lation of AT&T. Specifically, an examination of still continue to employ asymmetric regulation of standard market power criteria used in antitrust intrastate long-distance calling." Thus, while it analyses provides compelling evidence that AT&T appears that asymmetric regulation of AT&T has does not possess significant market power but, ended, in fact it has not quite yet.