Discussion Memo #2, Final Version (3/18/96)
ASSIGNMENT:
Why will vertical reintegration of the information network
industry (phones today, integrated services tomorrow) be bad for
competition?
DISCUSSION:
The Telecommunications Act of 1996 dramatically changes the roles of
regulation and competition in all sectors of the telecommunications
industry (local and long-distance telephony, cable television
transmission, television and radio broadcasting). The effectiveness of a
competitive market depends on the extent to which rival service providers
are simply price takers. Individual rivals will be unable to exert
market power only if previous entry barriers and bottlenecks of the
industry are effectively eliminated by advancing technology and remaining
regulation.
Despite the Congressional assertion that the telecommunications industry
can efficaciously be regulated by competition in lieu of decree, several
bottlenecks and entry barriers remain which will interfer with
competitive forces. Brief reviews of several of these obstacles to
competition follow.
Competition without Competitive Pressure
David Teece (note 1) states that "good regulatory policy
can promote the right kind of competition, that which responds to real
market demands and reflects real economic efficiencies." The 1984
antitrust counsel decree that dismantled the Bell System attempted to
promote Teece's "right kind of competition" in the long-distance market.
An analysis by the
National Economic Research Associates determined that introducing
competition to the long-distance market had little effect on consumer
benefits. The study (which focused on AT&T) concluded that due to a
significant lack of competitive pressure "nearly two billion dollars in
local phone company price reductions were kept by AT&T and not passed
on to consumers." A lack of competitive pressure allowed long-distance
carriers to hoard savings from reduced access charges meant for consumers.
Despite free-market competition, long-distance carriers retained the power
to set market prices. The NERA findings suggest that tacit
collusion among the leading long-distance companies (AT&T, MCI,
Sprint) continued unabated by the presence of between 500 and 1000 (note 2) long-distance competitors. The Act has the
potential to extend the operating realm of these practiced long-distance
competitors to the local market.
Subsidized Accounts
New entrants to the telephony industry target the most profitable sector
of the market, business customers, leaving the burden of serving the
nation's poor and hard-to-reach residential customers with the Bell
companies. The Bell companies have historically depended on profits from
business customers to subsidize these less- (or not-at-all) profitable
residential accounts. Eli Noam, director of Columbia University's Tele-Information
Institute in New York, points out that "keeping subsidies with the
Bells would clearly put them at a disadvantage" (WSJ, see note 2). Without
first overhauling the subsidy system, the Bell companies
will have an increasingly difficult time subsidizing accounts with
profits from their diminishing share of business accounts.
Compete or Merge?
The NERA report on the long-distance market indicates that the presence of
hundreds of specialized service competitors has had little effect on the
price to consumers offered by the market leaders. Even before the
Telecommunications Act passed into law, cross-service mergers became a
trend in the industry: AT&T acquired McCaw Cellular
Communication Company; Bell Atlantic, Nynex, US West, and Pacific Telesis
merged their wireless systems to form a national alliance; Sprint has
joined Telecommunications Inc., Comcast Corp., and Cox Entertainment to
form a national telephone and cable alliance; US West acquired Continental
Cablevision; America Online has formed alliances with AT&T's Internet
access business and Microsoft to mutually support each other's Internet
services and software. The Act seems to promote merging of intended
rivals rather than competition. This trend could leave the industry "with
just a few heavyweights that will politely stay out of one another's way,
leading to tacit collusion..." (WSJ, see note 2), similar to that
previously seen in the long-distance market.
In light of the fact that the Telecommunications Act of 1996 attempts to
provide unlimited opportunities for competition in related industries,
a definitive argument that the Act is bad for competition is difficult to
construct. However, while the Act does promote competition, several
obstacles to free-market competition remain. Access to the local loop
(and unresolved issues such as access fees, unbundling the local network,
and number portability), a history of ineffectual competition in the
long-distance market, the "universal access" aspect of telecommunications
services which introduces subsidized accounts, and the trend of merging
competitors are several areas which regulators still need to address
before Teece's "right kind of competition" can exist.
(note 1)Telecommunications in Transition:
Unbundling, Reintegration, and Competition, prepared for University of
Michigan Conference on Competition and the Information Superhighway, Ann
Arbor, Michigan, September 30, 1994, p. 26. (back to
memo)
(note 2) The Wall Street Journal Special Reports:
Telecommunications, Monday March 20, 1995.(back to
memo)
Submitted March 18, 1996
Dante diTommaso