An oligopoly analysis of AT&T's performance in the wireline long-distance markets after divestiture.

• Author: MacAvoy, Paul W.
• Position: The Enduring Lessons of the Breakup of AT&T: A Twenty-Five Year Retrospective

Having been present at the creation of "divestiture," as the next witness for the defense scheduled to be called before the court, the day after the surprise settlement, and therefore never heard, I had a seat at the table to listen to what was to be forthcoming. It was evident to me that AT&T management expected to become the dominant long-distance (LD) wireline service provider in nationwide business and residential markets, free of price controls of the FCC. The Antitrust Division never said that LD divestiture from the local exchange companies was expected to result in effective LD competition. Instead, the divestiture process plus open entry in LD markets was meant to create as many LD carriers operating as far away from regulation as possible in numerous duplicative carrier networks. (1) But the Antitrust Division made no connection between numbers of networks and competition among LD service suppliers.

The antitrust court, Judge Greene's district court, had plans to manage the process of creating duplicative national networks. The local exchange companies were forced to build out their interconnection nodes to provide parity for all old and new LD carriers in picking up and delivering calls. In the transition period before parity was achieved, beginning in 1984, the regulated charges for interconnection favored the other carders, and these new carders then expanded relative to AT&T. AT&T lost a third of its 90% plus share of call revenues, in both national residence and business service markets. Accounting for revenue shares of AT&T, and the entrants MCI and Sprint, with then-comparable national service offerings, the Herfindahl-Hirschman Index (HHI) fell from close to 0.9, indicative of a market structure in which there were 1.1 firms, to 0.5, similar to that for two equally sized firms by the end of the first dozen years of the court remedy process. (2) The prices in AT&T's tariff were still subject to caps set by the FCC, because AT&T was still defined as a "dominant firm" by the FCC while MCI and Sprint were not. While the caps were seldom limiting, the FCC process allowed the three carriers to set the same prices; AT&T submitted its tariff to the FCC as required and the other two followed voluntarily.

The Judge Greene court, in effect, was implementing the regulatory reform programs of the Ford and Carter Administrations in the other network industries. These programs: (a) separated ownership of the product at the entry node from transport services from that node to the exit node, and (b) regulated prices for link and node utilization where there were open entry "bottlenecks." By legislation or agency rulemaking, the gas networks or power grids were restructured into newly defined, open-entry regional markets subject to price caps at key nodes. These partial deregulatory policies proceeded through the mid 1980s to the late 1990s changing only to add auction markets in place of some price controls. The Greene court's antitrust policy in the AT&T divestiture went in this direction.

The AT&T revenue share from wireline services declined by 2% to 5% per year from 1984 to 1991, then stabilized at 65%...