The Failure of Antitrust and Regulation to Establish Competition in Long-Distance Telephone Services.

• Author: Montanye, James A.

AT&T's absolute monopoly of the supply of switched long-distance telephone services ended in 1976 with the rollout of MCI's outlaw Execunet offering. Twenty years later, economists are questioning whether AT&T remains able to influence the prices at which long-distance services are sold and, if so, to what extent AT&T exercises this market power. The first scholarly studies in this area relied largely on theory and deduction, and their results were ambiguous. Empirical studies followed, but the issue has remained unresolved.

Paul MacAvoy, a distinguished economist at the Yale School of Management and coeditor of the voluminous AEI Studies in Telecommunications Deregulation series, weighs in with a comprehensive quantitative study purporting to show not only that AT&T retains considerable market power but also that the long-distance industry performs as a tacitly collusive, three-firm oligopoly with AT&T leading itself, MCI, and Sprint to super-competitive profits. MacAvoy's analysis shows that industry concentration and market shares stabilized around 1990 and that pricing and profit margins have converged and risen in lock step. The gravamen of MacAvoy's thesis is that long-distance markets never have performed competitively and, due to the persistence of regulatory and antitrust constraints, have moved systematically away from competitive performance.

MacAvoy's conclusions call into question the efficacy and direction of national telecommunications policy. If twenty years of regulatory and antitrust policy have failed to produce robust competition, then that policy has been a dismal and costly failure. His conclusions warrant attention, especially because policymakers have launched an even more adventuresome and potentially costly plan to transform the local telephone service monopoly into a competitive industry.

The book's title understates the thrust of its argument: it is not that the government tried and failed to create a competitive market but, rather, that the government didn't try at all. MacAvoy documents how federal regulatory and antitrust policies have been used to hamstring AT&T and to nurture its rivals, all to the detriment of competition. He suggests two possible explanations for these policies: regulators enjoy micromanaging the industry and have been reluctant to stop; and, more ominously, regulators may believe that unfettered competition is unsustainable.

MacAvoy argues that the country has been misled into believing...