Dim Prospects: Effective Competition in Telecommunications, Railroads and Electricity

• Published date: 01 March 1997
• DOI: 10.1177/0003603X9704200111
• Author: William G. Shepherd
• Date: 01 March 1997
• Subject Matter: Economic

The Antitrust Bulletin/Spring 1997 151

Dim

prospects: effective competition

in telecommunications, railroads

and

electricity

BY WILLIAM G. SHEPHERD*

Deregulation is successful only when the formerly-regulated mar-

ket becomes fully competitive. There have been deregulatory suc-

cesses in certain favorable situations (for example, stockbrokerage

after 1975 and airlines after 1978), where competition was already

bursting at the seams. But deregulation has not yet transformed a

sizable

regulated

pure

monopoly

in

the

U.S.,

taking

it

down

through single-firm dominance and then tight oligopoly, so as to

reach fully effective competition.

*Professor of Economics, University of Massachusetts, Amherst.

AUTHOR'S NOTE: This article is adaptedfrom papers presented at various

conferences during 1995 and 1996, and before various federal

and

state

regulatory

bodies

including

Massachusetts, Florida,

New

York,

and

Montana.

I wish to thank participants at those meetings

for

helpful comments.

I am also indebted to Harry M. Trebing,

and

to William

l.

Baumol, Ken-

neth D. Boyer, Henry de long, Harold Demsetz, Donald

l.

Dewey,

lames

R. Nelson, George J, Stigler, and Donald F. Turner.

©1997 by Federal Legal Publications, Inc.

152 The antitrust bulletin

Maybe telecommunications and electricity will be the first for

the

u.s.

They are undergoing deregulation in the 1990s, following

the

railroads'

deregulation

in

the

1980s.

1

Some

optimistic

observers

say

that

competition

is

already

well

advanced

in

telecommunications and wholesale electricity markets and will

soon become effective throughout both industries. Meanwhile the

railroad

industry

seems

to be

backsliding,

with

various

large

mergers that appear to restore market power.

In fact, deregulation and lenient merger policies may instead

lead substantial parts of these industries into a stable situation of

market

dominance,

sheltered

under

antitrust.

If

deregulation

moves ahead incautiously in these industries, and mergers are too

freely permitted, antitrust may soon be burdened with a large new

set

of

entrenched

dominant

firms. Antitrust is

generally

at its

weakest precisely in trying to shift dominance to full competition.

Therefore regulation, which has often been a haven for franchised

monopolies, may soon be replaced by an antitrust haven for stable

market dominance.

Deregulation is often plagued by a mistaken belief that getting

alittle competition is as good as achieving fully effective compe-

tition. That misunderstanding is increased because the regulators'

old skills in applying static-efficient regulatory pricing rules are

largely irrelevant to the antitrust criteria for the new dynamic pro-

cesses involving market power and competition. Conditions that

are

favorable

for

efficiency

under regulation (such perhaps as

price

discrimination)

can

quickly

become

harmful

devices

in

dominant-firm situations (for example, that same price discrimi-

nation, when it is now applied against small competitors, can sup-

press competition).

The

principal legal steps

have

been: in railroads, the

Staggers

Railroad Deregulation Act

of

1980

and

the abolition

of

the Interstate

Commerce Commission in 1996; in electricity, the Public Utility Regula-

tory Policies Act

of

1978 encouraging new sources of competition in

electricity, and the Energy Policy Act of 1992 that broadened the stimu-

lus; and in telecommunications the antitrust divestiture of AT&T in 1984,

as extended by the Telecommunications Competition Act of 1996.