Regulation and the vertically integrated firm: The case of RBOC entry into interlata long distance

Congress is considering telecommunications reform legislation that would allow the Regional Bell Operating Companies (RBOCs) to enter the interLATA long-distance market. A concern is that a vertically-integrated RBOC would be able to discriminate against its rivals. A proposed remedy would require the RBOCs to reduce their access market share as a precondition to interLATA entry. We show formally that such a precondition likely contributes to higher long-distance prices and enhances the risk of discrimination. Furthermore, the lower the share of access profits retained by an RBOC, the weaker are its incentives to lower long-distance prices.I thank Timothy Brennan, Barbara Cherry, Alfred Kahn, Alex Larson, David Sappington, David Sibley, Lester Taylor, and Steve Wildman for insightful comments on an earlier draft of this paper. I am also grateful to the editor, Michael Crew, and an anonymous referee for a particularly careful reading of this work and for many constructive suggestions for revision. The usual caveat applies.