The Role of Antitrust in Telecommunications

Date01 September 1995
Published date01 September 1995
DOI10.1177/0003603X9504000303
AuthorRoger G. Noll
Subject MatterVertical Integration by Local Telephone Companies: Economics, Law and Politics
The Antitrust Bulletin/Fall 1995
The role
of
antitrust in
telecommunications
BY ROGER G. NOLL*
501
Controversy
about
the
role
of
competition
and
antitrust
in
telecommunications is celebrating its 100th anniversary. Conflict
began in the 1890s, when the first Bell patents expired and com-
petitors entered local service. The issue was and remains whether
an integrated company achieves efficiency through economies of
scale and scope, or profitable but inefficient anticompetitive
extension of monopoly power into vertically related markets.
This article outlines the controversies about vertical integra-
tion
and
competition
in
telecommunications,
and
provides
a
framework for defining the appropriate role
of
antitrust in the
industry. The first section discusses the heart of this controversy:
the realism and importance of vertical foreclosure in the industry.
The second section examines some recent cases, including the
proposal to allow Ameritech in enter long-distance service in
return for introducing local competition.
*Morris M. Doyle Professor of Public Policy, Department of Eco-
nomics, Stanford University.
AUTHOR'S NOTE: The author gratefully acknowledges research support
from the Markle Foundation.
©1995 by Federal Legal Publications. Inc.
502
The antitrust bulletin
I.
Vertical foreclosure
Most policy disputes in telecommunications refer to vertical
foreclosure. Early in the 20th century, the foreclosure issues arose
from AT&T's integration into manufacturing and its refusal to
interconnect independent local exchange carriers to its long-dis-
tance network. (Another issue was the refusal
of
competitive,
overlapping local exchange companies to interconnect.) These
disputes were resolved by the Kingsbury Agreement,' but vertical
integration into manufacturing remained controversial. During the
debate about the Communications Act of 1934, Congress consid-
ered a provision to prohibit common carriers from manufacturing
equipment, but the final bill only asked the FCC to study the issue
and report back.s By the time the FCC reported, World War II had
begun, and no congressional action was taken.
Vertical integration
of
common carriers and manufacturing
was the sole issue in the 1949 Department
of
Justice antitrust
complaint" and one of the major issues in the 1974 case that led to
divestiture." In addition, two
new
issues arose after the war:
bundling access service and customer premises equipment, with a
refusal to allow customers to attach their own equipment to the
network." and refusing to interconnect competitive private line
and long-distance suppliers to local exchange carriers.
u.s.
v.
AT&T
1 Decrees and Judgements in Civil Federal Antitrust
Cases 554 (D.C. Ore. 1914).
2A
LEGISLA
nVE
HISTORY
OF
THE
COMMUNICA
nONS
ACT
OF 1934 (Max
Paglin ed., 1989).
U.S. v. Western Electric, C.A. 17-49 (D. N. J. 1949).
4U.S. v. AT&T, 552 F. Supp. 131 (D.D.C. 1982) and U.S. v. West-
ern Electric, 569 F. Supp. 990 (D.D.C. 1983).
The key cases are Pastor v. AT&T, 76 F. Supp. 781 (S.D.N.Y.
1940); Recording Devices, 11 FCC 1033 (1947); Jordaphone, 18 FCC
644 (1954); Hush-A-Phone v. U.S., 238 F.2d 266 (D.C. Cir. 1956);
Carter v. AT&T, 250 F. Supp. 188 (N.D. Tex. 1966); Carterfone, 13 FCC
2d 433 (1968); and the "Part 68" testing procedure in Proposals for New
and Revised Classes
of
Interstate and Foreign MTS and Wats, 56 FCC 2d
593 (1975).

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