AT&T and the consent decree

For years AT&T has been accused of being too big, too powerful and too pervasive. Since the late 1960s, FCC decisions aimed at introducing limited competition in some areas of the telecomunications market have eroded AT&T's monopoly position. Then, in 1974, the Department of Justice filed its antitrust suit seeking to dismantle the Bell System. In January 1982, AT&T signed a Consent Decree requiring them to divest the local portions of its 22 Bell operating companies. In this comment, Charles Brown (Chairman of the Board of AT&T) describes the build-up to AT&T's decision to agree to divestiture, and outlines how AT&T os adapting to the new telecommunications environment.     

Dissecting divestiture: A telecommunications book review article

This paper critically reviews the regulatory history of telecommunications as rendered in four recent books: Temin'sThe Fall of the Bell System, Henck and Strassburg'sA Slippery Slope, Wender'sThe Economics of Telecommunications, and the multicontributorDisconnecting Bell. Only Wender's regulatory cartel theory seriously competes with the Government's theory inU.S. v. AT&T as an explanation for AT&T's behavior under regulation. In response to inconsistencies between Wender's view and the historical record, an historically consistent alternative hypothesis of AT&T and regulator behavior is developed from clues apparent in the form of the AT&T divestiture.     

Financial planning issues concerning funding, pricing and organization of corporate R&D activity: A case study

This paper is a case study of financial planning issues concerning funding, pricing, and the organization of corporate research and development (R&D) activity faced by American Telephone and Telegraph Company (AT&T) after the break up of the Bell System. The paper concludes that from the standpoint of financial planning, and in the context of firms similar to AT&T, a variant of the predivestiture model, rather than a profit centre model or a market model, appears to be the most efficient way of funding, pricing and organizing corporate R&D activity.     

The effects of divestiture,privatization, and competition on productivity in U.S. and U.K. telecommunications

The telecommunications industries in the United States and the United Kingdom have undergone massive changes during the 1980s. This paper decomposes the total factor productivity growth of AT&T and British Telecom into their various components. It finds that while a great deal of the productivity increases apparently resulted from continuing scale economies, competition for AT&T and privatization of BT have been responsible for 17 percent and 25 percent of their respective gains in recent years. Among other variables, divestiture appears to have initially depressed AT&T's productivity growth, and competition for BT is too insignificant to yet have an impact.     

Rural telephony since divestiture

This paper determines whether local rural telephone rates have increased as well as whether rural rates have increased more or less than other telephone rates since the divestiture of AT&T. Also, examined are long distance rates, penetration levels and subsidization in rural telephone markets in an attempt to ascertain whether universal service is in jeopardy in rural areas.The author would like to thank Erwin A. Blackstone, Gerald Faulhaber and Alfred E. Kahn for their helpful comments.     

Telecommunications market structure in the USA: The effects of deregulation and divestiture

AT&T divestiture of its 22 operating companies in January 1984 ended the world's largest vertically integrated channel of telecommunications distribution. At the same time, customer premise equipment sales were deregulated in the USA by the FCC. This article explores the background policies which led to the changes, and examines the marketing opportunities which have arisen, together with likely future structural changes. The author concludes that the network will become more competitive and more responsive to customers' unique equipment needs.     

Viewdata—a product in search of a market?

One of the classic marketing fiascos of the pasr decade was the $200 million boondoggle project hatched at the Bell Telephone Laboratories, known as Picturephone® service. Heralded as the new telephone of the 1980s, rosy sales projections suggested that as many as 1 000 000 Americans would have Picturephone® sets in their homes and offices by the mid 1980s. Wile these figures look delightfully quaint today, the shareholds of AT&T must not have felt so amused by that $200 million expenditure on engineering a system that no one wanted. Through the year 2000, MBA students at Harvard will be able to rediscover in case study form just how dangerous it can be for an organization to allow its engineering department to dictate new product development to the marketing staff. Of course in the Picturephone® case, AT&T could proffer a legitimate excuse: the Vice President of Marketing position at Bell had lain dormant and abandoned for almost a quarter of the century. After all, who needs to sell telephone service?     

Implications of deregulating satellite communications

Following the divestiture of AT&T, US policy makers have focused attention on means of increasing competition in international telecommunications markets. Several policy changes have been made by the FCC to deregulate international satellite communications. International concern has been aroused by the Reagan administration approval of alternative international satellite systems. INTELSAT and PTTs fear the systems will permit multinational corporations to bypass them, shifting the cost burden onto individual users and developing nations. While there are risks to be avoided, the potential effects of the private international satellite systems have been exaggerated by supporters and opponents.     

The US telecommunications industry in transition: Bypass,regulation and the public interest

Since the AT&T divestiture, the Federal Communications Commission has been attempting to introduce competition into the telecommunications industry in the USA. This article discusses the problems of the transition period, particularly the contradictions between the policy of widespread availability of affordable basic telephone service, and the short-run burdens on most subscribers as competition erodes the toll-to-local subsidy. The authors discuss welfare economics in the telecommunications industry, and propose an interim and self-terminating plan for gradual deregulation. The proposal includes an empirical test of economic or uneconomic local exchange bypass, and a social compensation option which meets the requirements of Pareto superiority.     

Price convergence in contestable market structures: The impact of time and price-caps on intercity telecommunications rates

In this study, we tested if long-distance rates among AT&T, MCI, and US Sprint between New York City and six major SMSAs during 1980–91 have converged. Empirical findings show that rates have converged over time, that rate ratios or differences increased under price cap, and that distance does not have any impact on rate convergence. The variables of TIME and price cap (CAP) have greater impacts on rate convergence for AT&T/US Sprint than AT&T/MCI. Regression results based on pooled cross-section and time-series data yield better results.     

On modifying the MFJ

When the Bell operating companies (BOCs) were separated from AT&T in 1984, restrictions were imposed on the BOCs' business operations. The US Department of Justice was required to report every three years on the continuing need for these restrictions. Two reports were filed in February 1987 which contain a wealth of information and analysis, and recommend a waiver of most of the restrictions. This comment examines the mechanism by which regulation has historically distorted economic efficiency, and how the two reports address the mechanisms of monopoly distortion.     

Convergence and unbundling of corporate R&D in telecommunications: is software taking the helm?

This paper presents a view of the changing structure of corporate R&D in telecommunications – one that is close to Adam Smith’s insightful and enduring idea of division of labor – that perhaps we are witnessing the beginnings of vertical disintegration and unbundling of important segments of the industry’s R&D activity. The paper maintains that the emergence of an independent software industry – aided by the convergence of computer, telecommunications and imaging technologies – and the rapid growth of technology-based alliances are at the heart of this trend. So extensive is the vertical disintegration of R&D that, in 1997, the top 10 independent software vendors in the US spent more on R&D than the combined spending by AT&T and Lucent whose sales were well over three times as large. It appears that the source of future innovation in the telecommunications industry lies not in its services segment but rather in telecommunications and Internet equipment firms and independent software firms. Increasingly, the fortunes of large service providers like AT&T will depend less on innovation and more on their ability to configure and market complete one-stop-shopping solutions to customers by combining internal resources with outsourced technologies, products and services.     

Recent developments in US wireline telecommunications

This article presents a selective survey of several recent developments in the US market for wireline telecommunications services spanning the 2003–2005 period. Specifically, the article discusses the recent decline in overall telephone penetration rates, the substitution between wireline and wireless telephony, intermodal competition issues raised in the context of the FCCs review of the Cingular/AT&T Wireless merger, and the potentially anticompetitive effects of incumbent local exchange carrier tying of voice and DSL service. The article identifies several areas for future research motivated by each one of these developments.     

The Role of Incentives for Opening Monopoly Markets: Comparing GTE and BOC Cooperation with Local Entrants

While the 1996 Telecommunications Act requires all incumbent local telephone companies to cooperate with local entrants, section 271 of the Act provides the Bell companies but not GTE additional incentives to cooperate. Using an original data set, I compare the negotiations of AT&T, as a local entrant, with GTE and with the Bell companies in states where both operate. My results suggest that the differential incentives matter: The Bells accommodate entry more than does GTE, as evidenced in quicker agreements, less litigation, and more favorable prices offered for network access. Consistent with this, there is more entry into Bell territories.     

Antitrust and regulation: Forestalling competition in the telecommunications terminal equipment market

This article examines how AT&T responded to competition in the terminal equipment market by requiring a telephone company provided connecting arrangement. We test the hypotheses of whether connecting arrangements were used to protect the integrity of the system or to forestall competition. Through analysis of various antitrust cases, we conclude that AT&T attempted to monopolize the market through the connecting arrangement requirement. This conclusion is important because it suggests that a regulated firm has the ability to use its market power to thwart competition in non-regulated markets.     

Local exchange competition in early US network development: considerations for developing countries

This paper examines the claim that competition between the Bell system and independent telephone companies, and not AT&T's regulated monopoly, was responsible for the rapid growth in telephone penetration in the United States. A mathematical model is developed to test if competition contributed to network expansion, when alternative explanations such as diffusion and economic growth are also taken into account. The model is estimated with time series data on telephone penetration in the US from 1876 to 1982, using both Ordinary Least Squares (OLS) and Feasible Generalized Least Squares (FGLS). The results indicate that local exchange competition is indeed a significant influence on increase in telephone penetration, even in the early stages of network development. This has clear policy implications for the current transition to competition in developing countries.     

Contested Resources: Unions,Employers, and the Adoption of New Work Practices in US and UK Telecommunications

The pattern of adoption of high‐performance work practices has been explained in terms of strategic contingency and in terms of union presence. We compare the post‐deregulation/privatization changes in work practice at AT&T, Bell Atlantic and British Telecom. On the basis of these cases, we argue that the choice of new work practices should be understood as a consequence not only of the company's resources or changes in its environment, nor of a simple union presence, but also as a consequence of the practices' effects on union power, the nature of the union's engagement, and the union's strategic choices.     

The success of divestitures in merger enforcement: Evidence from the J&J-Pfizer transaction

Despite being a widely used tool in merger enforcement, there have been few studies of whether antitrust divestitures are successful. We help fill this void by conducting a study of the divestitures relating to Johnson & Johnson's $16.6 billion acquisition of Pfizer's consumer health division in 2006. Six brands were divested in this matter to alleviate antitrust concern. For three of the brands, their pre- and post-divestiture performances are similar, while the remainder underwent changes that do not appear to be divestiture related. Overall, the results are consistent with the view that the divestitures maintained the pre-transaction level of competition.     

Antitrust in High-Tech Industries

Recent economic growth has been led by high-technology industries (See Jorgenson, Ho & Stiroh (2005) for a summary of the research on the recent acceleration of productivity growth). Many firms in these industries have achieved a dominant market position, thereby attracting the attention of competition authorities, often resulting in major monopolization cases. Unfortunately, this attention has not resulted in improved market outcomes. In this paper, we evaluate the effect of Section 2 Sherman Act cases brought against IBM, AT&T, and Microsoft. We conclude that these cases had limited effect on consumer welfare because they did not stimulate entry or innovation. In these industries, competition authorities cannot expect to promote simply an expansion of output and lower commodity prices; rather they should focus their remedies on promoting innovation—new products that replace or compete with the dominant firm’s products.     

Interstate Long Distance Rates: Search Costs,Switching Costs,and Market Power

A number of authors have argued that the divestiture of AT & T did not reduce the rates of long distance telephone companies as often believed. However, the literature has offered few explanations as to why competition has not lowered rates. This study argues that rates have failed to fall due to the importance of search and switching costs in the industry. Using a panel data set of rates for the three largest long distance carriers, stretching from 1984 to 1993, a reduced form equation is specified to empirically test for the influence of search and switching costs on the price cost margin of the three carriers. The results illustrate that both search and switching costs have provided long distance carriers with market power.