Deregulation and Predation in Long-Distance Telecommunications: An Empirical Test

• Author: John W. Mayo,David L. Kaserman,Simran K. Kahai
• DOI: 10.1177/0003603X9504000308
• Published date: 01 September 1995
• Date: 01 September 1995
• Subject Matter: Predation in Telecommunications: History, Cases and Empirical Evidence

The Antitrust Bulletin/Fall 1995

Deregulation and predation in

long-distance telecommunications:

an empirical test

BY SIMRAN K. KAHAI, * DAVID L. KASERMAN**

and JOHN W. MAYO***

645

*

Perhaps one

of

the most efficient methods

for

disadvantaging

existing and prospective competitors that is available

to an incumbent firm is through the strategic use

(or abuse)

of

the political and legal process.

Janusz A. Ordover &Garth Soloner,

Predation, Monopolization, and Antitrust,

in 1HANDBOOK OF INDUSTRIAL ORGANIZATION,

573 (Richard Schmalensee &Robert D. Willig, eds., 1989).

Research Associate, Auburn University.

** Torchmark Professor

of

Economics, Auburn University.

*** Professor

of

Economics, University of Tennessee.

AUTHORS' NOTE: The authors appreciate the helpful comments provided

by Tim Brennan on a previous draft. The usual caveat applies. Both

Kaserman and Mayo have filed testimony and appeared as expert wit-

nesses on behalf

of

AT&T in various regulatory proceedings. The views

expressed here are solely those

of

the authors.

©1995 by Federal Legal Publications, Inc.

646

The antitrust bulletin

I. Introduction

Economists (and corporate managers) have long recognized that

legal and regulatory processes can be used strategically to subvert

competition. In certain situations, a firm or group of firms may be

able to convince legislators and/or regulators that some given

constraint that reduces the ability of rivals to compete effectively

is in the "public interest." Where such attempts are successful, the

regulatory power of the state is enlisted as a vehicle to raise these

rivals' costs and, thereby, reduce the intensity

of

competition.'

Moreover, the ability of firms to distort regulatory decisions in

this fashion frequently arises from the strategic use of antitrust

issues or competitive "concerns."

That

is, one group

of

firms

will convince regulators that, in the absence of the recommended

constraint, certain anticompetitive consequences will be forth-

corning.>

Clearly, the ability of firms to employ the regulatory process

to achieve strategic anticompetitive ends rests heavily on the

inability

of

regulatory officials and

their

staffs to accurately

assess both the legitimacy

of

proponents' claims and the com-

petitive- consequences

of

their

own actions.

That

inability, in

turn,

stems from a

general

lack

of

expertise

and

experience

among regulators in evaluating what are traditionally antitrust

questions, such as market definition, entry conditions, market

power, and predation. The adjudication of rate cases under condi-

tions of entry-blockaded franchise monopoly provides neither

opportunities to develop nor requirements to hold expertise in the

On the profitability

of

raising rivals' costs, see Steven C. Salop &

David

J.

Scheffman,

Raising

Rivals'

Costs, 73 AM. Ecox.

REV.

267

(1983); and Thomas G. Krattenmaker &Steven C. Salop, Anitcompetitive

Exclusion: Raising Rivals' Costs to Achieve Power Over Price, 96

YALE

L. J.

209

(1986).

Strategic

use

of

legal

and

regulatory

processes

to

increase rivals' costs represents asubset

of

the class

of

behavior that has

come to be known as rent seeking. For a survey

of

the literature on rent-

seeking behavior, see Robert D. Tollison, Rent Seeking: A Survey, 35

KYKLOS 575 (1982).

2See William J. Baumol &Janusz A. Ordover, Use

of

Antitrust to

Subvert Competition, 28 J. L. & Ecox. 247 (1985).