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From frankp@galena.bellcore.com Mon May 4 14:19:26 1992
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Date: Mon, 4 May 92 14:15:32 EDT
From: frankp@galena.bellcore.com ("frank perez)
Message-Id: <9205041815.AA00365@galena.gems>
Apparently-To: ptownson@gaak.lcs.mit.edu
Status: R
Dear Mr. Townson:
Here is the revised ascii version of my article.
Sincerely yours,
Franklin Perez
-------------------------------------------------------------------------------
Date: March 5, 1992 From: Franklin Perez
Subject: The Case for a Completely
Deregulated Free Market
Telecommunications Industry
1. Introduction
"There is no general theory of public utility regulation. What
often passes for theory is a reconstruction of historical events
woven into a pattern of generalization to meet contemporary
issues. Thus, while the thesis that `Regulation is the law's
substitute for competition' is the legend on the wall of the
Michigan Public Service Commission's hearing room,1 there is
scant evidence that those who invoke the slogan have examined the
differential impact of market competition and regulated monopoly
on price, market development, and innovation. While market
competition provides consumers no perfect guarantee of price
benefits or rapid technical and operating innovation, it creates
a readier climate for such developments than does regulated
[government-enforced] monopoly. The available historical evidence
indicates that, at least in the communications industry,
regulation has served to stabilize price and earnings of the
carriers, has inhibited innovation in rate structures, and has
protected the carriers from the competitive inroads of private
manufactures and suppliers."2
Many individuals supporting the public utility paradigm for
telecommunications do so on the basis that if telecommunications
were left to be at the whims of the free market system, the
natural monopoly nature of telecommunications would manifest
itself, leaving one private monopoly firm to occupy the field. I
will demonstrate in this paper that (a) telecommunications is not
__________
1. Richard Gabel, "The Early Competitive Era in Telephone
Communication, 1893-1920," Law and Contemporary Problems 34
(Spring 1969): 340. "AT&T, Profit, Performance and Progress,
A study of Regulated and Nonregulated Industry for Bell
System Use 64 (1952)."
2. Ibid.: 340.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 2 -
a natural monopoly and (b) the best environment for
telecommunications is the free enterprise system as follows:
1. The section, "Survey of the Competitive Era: 1893 - 1920,"
gives a brief history of the competitive era in telephony
from 1893 - 1920. This section sheds light on the charge
that "competition in communications led to inefficiency,
poorer quality, and higher cost in telephony...."3 It
indicates basically that the net effects of telephone
competition were favorable.
2. The section, "Debunking the Natural Monopoly Theory," will
demonstrate that, at least in the United States, the
eventual formation of mainly one firm providing all the
telecommunications was not the result of the natural
monopoly nature of telecommunications in a free market, but
more than likely was due to governmental interferences such
as the issuance of exclusive franchises in many key high-
volume major cities.
3. The section, "Effects of the Public Utility Paradigm in
Telecommunications," basically states that public
regulation of privately-owned government-enforced telephone
franchises is bad.
4. The section, "Free Market Telecommunications Environment,"
describes the benefits of a free market telecommunications
environment. It goes into the effects that it has had on
those parts of the telecommunications industry that have
undergone deregulation, the effects of having a competitive
environment in the local loop, and the net effects of
having a completely deregulated telecommunications
industry.
2. Survey of the Competitive Era : 1893 - 1920
"The independent telephone industry began in 1893 with the
expiration of the Bell System patents on the telephone handset.
From its inception until about 1913 there was limited
interconnection between the independent and the Bell exchanges.
Refusal to interconnect was, of course, a tool employed in the
competitive battle for domination of the industry.
__________
3. Ibid.: 341.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 3 -
Interconnection refusal was not limited to the strictly
duplicating situations, but was also extended to service areas
where Bell had never chosen to provide telephone service. When
competition took the form of overlapping exchanges of rival
companies,4 the impact on plant requirements was apparent. A
subscriber desiring telephone service with access to all users
was required to obtain two separate telephone instruments; a
separate subscriber loop had to be furnished from each telephone
instrument to a central office, necessitating separate central
office lines both served by switchboard operators.5 There clearly
must have been some duplication of facilities and investment
under this arrangement. However, the degree of `inefficiency' and
`higher cost' has never been demonstrated, and perhaps it is not
determinable."6
It is interesting to note which would be cheaper - (a)
subscribing to two telephone companies in a competitive telephone
environment or (b) being forced to subscribe to a government-
enforced monopolistic franchised telephone company if one wants
telephone service. It turns out that it is actually possible to
have telephone service cheaper in case (a). In fact, according to
a 1909 AT&T annual report, in 1894 at the beginning of telephonic
competition, the Bell System was charging an annual average of
$65.00 to residential customers connected to AT&T exchanges that
were facing competition,7 while in 1909, when telephonic
competition was really under way, the Bell System was charging an
annual average of $22.80 to residential customers connected to
those same exchanges,8 and the independents were charging an
annual average of $23.25 to those same residential customers.9
__________
4. Ibid.: 341. "In 1907, overlapping territory was estimated at
20%, but this was only about one-third of all exchanges. G.
Johnston, Some Comments on the 1907 Annual Report of AT&T
(Int'l Independent Tel. Ass'n, Sept. 1908)."
5. Ibid.: 341. "The duplication of subscriber directory services
must have been a source of annoyance to business customers."
6. Ibid.: 341-342.
7. Ibid.: 346.
8. Ibid.
9. Ibid.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 4 -
Notice then that in 1907, a residential customer could subscribe
to the Bell and independent telephone companies for a total
annual charge of $46.05, a lot cheaper than the annual charge of
$65.00 in 1894, when telephonic competition was just beginning
and the Bell System had almost all the telephone market.
"Early Bell System telephone development [during its patent
monopoly] took place at the business core of large urban
communities.10 Since territorial extension by the competing
independents was for the most part to contiguous rather then
overlapping geographic areas,11 the provision of distribution
plant must have been more often complementary than duplicative.
For the small central offices in use at the time there were no
significant differences in cost per line for separate as against
combined switching facilities, and, in the absence of
interconnection, this could not have materially affected total
investment.12 Dual services, in the absence of interconnection of
the rival companies at the central offices, necessarily required
dual telephone instruments, but the instrument and its associated
wiring probably made up less than ten per cent of the average
investment per station.13 Any rigorous examination of the effect
of competition on communication costs would require knowledge of
the capacity and rate of utilization of facilities prior to and
subsequent to the inroads made by the independents."14
__________
10. Ibid.: 342. "1910 AT&T Ann. Rep. 23-24."
11. Ibid.: 341. "In 1907, overlapping territory was estimated at
20%, but this was only about one-third of all exchanges. G.
Johnston, Some Comments on the 1907 Annual Report of AT&T
(Int'l Independent Tel. Ass'n, Sept. 1908)."
12. Ibid.: 342. "In 1902 the average switchboard served 225
lines. Bureau of the Census, Special Reports - Telephones
and Telegraphs, table 37, at 33 (1902)."
13. Ibid.: 342. "Investment per station at the turn of the
century was about $200. 1911 AT&T Ann. Rep. 17. This source
shows the average plant cost per exchange station from 1895
to 1911. The concurrent investment in station equipment is
estimated at about $20 per station."
14. Ibid.: 342.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 5 -
"A characteristic of telephone service is that it must be planned
for and constructed in anticipation of future demand. A common
lament of the Bell System at the time (reflected in reports to
shareholders) was that its own facilities were continually
inadequate to meet market demand or were not physically located
where demand had developed.15 It can be conjectured that where
independents did make inroads into Bell territory and literal
duplication of service areas occurred, it was largely due to
either the unavailability of Bell plant or the promotional
efforts and attractive pricing offered by independent operating
companies."16
"In evaluating the [common] charge that telephone competition
engendered inefficiency, poorer quality, and higher costs,
several considerations must be borne in mind. All competition
involves some redundancy of plant facilities and work effort. The
question is whether the pressure of competing market forces
produces a better or cheaper product than a single supply
service. The evidence is clear that under a regime of monopoly
supply, during the period 1879-93, the system was stagnant. The
competitive period following expiration of the Bell patents in
1893-94 resulted in the most rapid rate of growth of service in
the history of the industry as well as in a substantial reduction
in rates for business and residential telephone service. This
comparison alone does not satisfactorily or completely answer the
question whether competition was inefficient and costly. Yet
with respect to the duplication argument for inefficiency we see
evidence of plant redundancy within the Bell System itself -
duplication and triplication of exchange cable facilities,
establishment of second and third wire centers within a few years
of opening an initial office. Of course, this evidence may merely
attest to the lack of omniscience of a highly centralized,
carefully planned telephone organization. But just as Bell
spokesman would argue that a second cable on the pole line does
not represent inefficiency or high cost, the independents could
insist, during the competitive era, that in a period of extremely
rapid growth (created by their existence) all facilities were
efficient, necessary, and provided at reasonable cost."17
__________
15. Ibid.: 342. "1900-07 AT&T Ann. Reps."
16. Ibid.: 342.
17. Ibid.: 342-343.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 6 -
"The infusion of competition did force a substantial disruption
of the operations of the Bell System. Profitability, rate levels
and structure, and the whole innovative process were markedly
affected by the coming of competition. The Bell System did not
take this assault lightly. It changed tactics and practices and
ultimately appealed for state intervention - the regulatory
process - to stabilize and normalize competitive forces."18
3. Debunking the Natural Monopoly Theory
3.1 Customers Will Eventually Subscribe to the Larger Telephone
Network
It has often been asserted that telephone service is a natural
monopoly, and thus that it should be regulated since telephonic
competition eventually leads to one telephone company controlling
the market. One argument goes as follows: "In the early years of
telephony, many cities had more than one telephone company....
Wherever that happened, it created a bothersome and unstable
situation. Frequently, the person one sought to phone was served
by the other company. Business offices and heavy phone users had
to have two telephones. Generally, the greatest value from
having a phone was obtained by subscribing to the larger of the
two systems, for in that way one could reach more people. As a
result, whenever one company became much larger than another, the
swing to the bigger system would accelerate, and soon the smaller
company would have to throw in the sponge. The only way for some
companies to keep going for a while was to cut rates, but in the
end this meant that they did not have the capital for expansion.
At least within single communities the phone system was a natural
monopoly."19
The assertion that individuals will automatically swing to the
larger system is disputed by Kenneth Lipartito (with respect to
the long-distance toll network (Bell System) being the larger
network): "Though not totally false, this interpretation misses
many crucial aspects of the story. Competition had demonstrated
that telephone service was not a natural monopoly. It had neither
the declining long-run average costs nor the fixed capital
__________
18. Ibid.: 343.
19. Ithiel de Sola Pool, Technologies of Freedom (London: The
Belknap Press of Harvard University Press, 1983), p. 102.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 7 -
investment that restricted entry.... A small-scale telephone
independent with a relatively modest initial outlay could offer
rudimentary but profitable service in even poor regions like the
South.20 Though Bell, with its more extensive system, could
provide a level and quality of service that small-scale
competitors could not match, that service was also more costly
than independent alternatives. In places like the South, where
demand for high-quality long-distance service was moderate,
Bell's superior quality service was not a decisive factor in
competition. Finding numerous customers who preferred their
cheaper alternatives, independents flourished even while Bell
built its integrated local and long-distance system. In the
Midwest, competitors even began to make inroads in the long-
distance market, suggesting that AT&T might not remain dominant
even here.21 "22
The assertion that at "least within single communities the phone
system was a natural monopoly" can also be disputed. According to
the natural monopoly theory, two different telephone companies
serving the same geographical area eventually leads to one
company overtaking the other. What this theory ignores is that
each telephone company can serve a market niche based on class of
individuals that the other does not provide. In fact a "curious
and intriguing feature of the era of telephone competition is
that in the older cities where it occurred, there was a tendency
for the sides to be drawn along class lines. The two competing
__________
20. Kenneth Lipartito, The Bell System and Regional Business: The
Telephone in the South, 1877-1920 (Baltimore: Johns Hopkins
University, 1989), p. 250. "For information on the economics
of the telephone industry, see Robert Bornholz and David
Evans, `The Early History of Competition in the Telephone
Industry,' in David Evans, ed., Breaking Up Bell: Essays on
Industrial Organization and Regulation (New York, 1983),
7-40."
21. Ibid., p. 250. "Bornholz and Evans, `The Early History,'
12-15. McMeal, The Story of Independent Telephony, 81-84. As
shown in chap. 5, the Interstate Telephone Company in North
Carolina successfully fended off Bell incursions in this way.
In the Midwest, associations of independent firms, as well as
several larger companies, built similarly successful regional
networks."
22. Ibid., p. 115.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 8 -
systems not being interconnected, it was possible to talk only to
those on the same system; naturally, one wanted to be able to
talk to one's friends, and perhaps those one would like to be
able to claim as friends. In Minneapolis, for example - according
to the recollection of a survivor of the competitive era there -
the Bell exchange, being the longer-established, was the exchange
of the socially elite [i.e., the wealthy], while the competing
Tri-State Telephone Company was for just about everybody else
[i.e., the not so wealthy]."23 Therefore, assuming that
individuals within the same socioeconomic class will tend to want
to interact with each other as opposed to interacting with
individuals of a different socioeconomic class, there is the
strong possibility that one telephone company will develop a
market niche for offering high-quality, expensive local telephone
service attracting individuals of the higher socioeconomic
classes while the other telephone company will develop a market
niche for offering lower-quality, less expensive local telephone
service attracting individuals of the lower socioeconomic
classes. There is evidence to indicate that this is what
actually happened: In the South and Midwest, "new... firms grew
by offering cheaper, lower-quality service, carving out an
important niche for themselves in the telephone market.24 "25
3.2 Natural Monopoly Theory Assumes Essentially Free Market
"It is imperative that one be clear and specific in one's
definition of `monopoly.' When people speak, in an economic or
political context, of the dangers and evils of monopoly, what
they mean is a coercive monopoly - i.e., exclusive control of a
given field of production which is closed to and exempt from
competition, so that those controlling the field are able to set
arbitrary production policies and charge arbitrary prices,
independent of the market, immune from the law of supply and
demand. Such a monopoly, it is important to note, entails more
__________
23. John Brooks, Telephone: The First Hundred Years (New York:
Harper and Row, 1976), p. 110.
24. Kenneth Lipartito, The Bell System and Regional Business: The
Telephone in the South, 1877-1920 (Baltimore: Johns Hopkins
University Press, 1989), p. 248. "AT&T Archives, box 1033,
Central Union Organization and Development, 1883-1912, Allen-
Fish, 11 February 1903."
25. Ibid., p. 104.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 9 -
than the absence of competition; it entails the impossibility of
competition. That is a coercive monopoly's characteristic
attribute, which is essential to any condemnation of such a
monopoly."26
"In the entire history of capitalism, no one has been able to
establish a coercive monopoly by means of competition on a free
market. There is only one way to forbid entry into a given field
of production: by law. Every coercive monopoly that exists or
has ever existed - in the United States, in Europe, or anywhere
else in the world - was created and made possible only by and acts
of government: by special [exclusive] franchises, licenses,
subsidies, by legislative actions which granted special
privileges (not obtainable on a free market) to a man or a group
of men, and forbade all others to enter that particular field."27
Many individuals espousing the natural monopoly theory of
telecommunications base their conclusions on the assumption that
an essentially free enterprise system occurred for
telecommunications during the 1893-1920 time frame in the United
States. This was not true of many situations. From the onset of
telephonic competition, there were severe governmental intrusions
that either impeded or barred a competitor from offering
telephone service within a geographic region.
There were numerous cases of independent telephone companies
wanting to establish telephone service in several major high-
demand cities where the Bell System was entrenched and were
either (a) denied a franchise or (b) granted franchises only
after meeting onerous requirements that the entrenched firm was
not required to meet.28 Examples of such practices are listed
below:
1. "In Buffalo, for example, a franchise was granted to the
Frontier Telephone Company on condition that it pay the
city fifty thousand dollars in cash and a 3 percent gross
receipts tax, and give the city the free use of one hundred
__________
26. Ayn Rand, Capitalism: The Unknown Ideal, (New York: The New
American Library, 1966), p. 72.
27. Ibid., pp. 72 - 73.
28. John Brooks, Telephone: The First Hundred Years (New York:
Harper and Row, 1976), p. 112.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 10 -
telephones, while none of these impositions were put upon
the local Bell licensee. Frontier soon went broke."29
2. In "San Francisco, representatives of the Bell licensee
were accused of outright bribery to bring about the defeat
of a competing franchise - in response, it is true, to an
attempt by the city's political boss to extort an improper
payment from the franchise seeker."30
3. In 1899, when the Telephone, Telegraph and Cable Company
tried to set up telephone service in the "richly profitable
New York City territory"31 in competition with the Bell
System, they were denied permission to set up business.32
John Brooks elaborates: "[B]y 1899 the Bell interests were
fighting it out in the streets of New York - or rather, in
the conduits under the streets. The New York Telephone
Company[, the Bell system company,] had its underground
wires in the conduits of the Empire City Subway Company,
and when the promoters of would-be telephone competition
asked permission to install wires of their own there, the
Empire City Subway Company refused - logically enough,
since New York Telephone controlled Empire City Subway
through stock ownership. The courts [even] refused the
independents permission to build their own underground
conduits, and that was the end of the threat of telephone
competition in New York City."33 (Note: The evil here is
not that the Empire City Subway Company refused to let the
would-be competitor install wires in its conduits - the
Company was merely exercising its private property rights -
but that the government, in this case, the courts, refused
to let the would-be competitor build its own conduits,
thereby creating a government enforced monopoly situation.)
__________
29. Ibid.
30. Ibid.
31. Ibid., p. 106.
32. Ibid., pp. 106, 108. From what is stated on page 108, I
conclude that the company that was denied a franchise was the
Telephone, Telegraph and Cable Company because this company
was organized in 1899.
33. Ibid., p. 106.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 11 -
4. "In Connecticut, for example, competition developed for the
first time in 1899 in the form of an independent company
that planned to establish service in New London using the
Strowger automatic system. After extended court hearings -
at which the president and superintendent of the local Bell
licensee, the Southern New England Telephone Company,
testified at length - the petition for a charter was
denied, and so the competitive project died."34
5. In Chicago, the Interstate Independent Association, an
association of independents providing long-distance service
in the Midwest, was denied access to the underground
conduits controlled by the city. Yet, the Bell System was
allowed access to these same conduits.35
The licensing procedure was also used to keep out prospective
telephone competitors, thus helping the entrenched telephone
company. "Before the license could be issued, the utility had to
satisfy the licensing authority that its service would be `in the
public convenience.' For example, the state of Ohio required a
telephone company to secure a certificate of convenience from the
Public Utilities Commission before exercising a franchise in any
town where there was already a telephone company furnishing
adequate service.36 In the village of Mendon, where one company
was already providing phone service, another company obtained a
franchise to do the same but was refused a certificate of
necessity by the state on the grounds that it was not in the
public convenience to have two telephone companies. The Supreme
Court of Ohio in 1921 sustained the denial."37
There is strong evidence to indicate that a lot of the success of
the Bell System, the entrenched firm in most of the major
profitable cities, in driving out the smaller independent
__________
34. Ibid.
35. Kenneth Lipartito, The Bell System and Regional Business: The
Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins
University Press, 1989), pp. 105 - 106.
36. Ithiel de Sola Pool, Technologies of Freedom (London: The
Belknap Press of Harvard University Press, 1983), p. 274.
"Sec. 614-52, Ohio General Code."
37. Ibid., p. 102.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 12 -
telephone companies was not due to the workings of the natural
monopoly inherent in telecommunications, but was due primarily to
government-enforced monopoly privileges given to the Bell System
in these major cities. Political muscle, not the so-called
inherently monopolistic nature of telecommunications, played a
key role in the Bell System appearing to possess monopoly power.
"Although some competitors arose to challenge Bell at its strong
points - the nation's large cities - few succeeded unless they
could exploit a weakness in Bell structure or gain political
support from city and state governments anxious to discipline the
Bell [government-enforced] monopoly.38 "39
There did arise during this period, in the smaller and mid-sized
cities where telephonic competition was allowed to flourish, a
regional long-distance company in the Midwest, thereby
challenging AT&T's dominance in the long-distance business.
"Connections to electrical manufactures and early efforts in
urban telephony served... [the midwestern independents] well in
the long run, enabling them to construct their own regional
systems in places between large cities and rural areas where
Bell's long-distance network was not yet extensive.40 By
connecting with each other, midwestern companies extended service
from `the eastern slope of the Rocky Mountains to the Atlantic
Coast....'41 As a result, midwestern firms were... able to stand
__________
38. Kenneth Lipartito, The Bell System and Regional Business: The
Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins
University Press, 1989), p. 245. "Philadelphia was the one
major eastern city where competitors made a significant
challenge."
39. Ibid., p. 94.
40. Ibid., p. 248. "AT&T Archives, Toll Maps. The maps show that
AT&T's system grew by connecting major cities along heavy use
routes first, then by filling in the gaps. It was in these
gaps that the independents could build their own long-
distance network. See also Ronald Abler, `The Telephone and
the Evolution of the American Metropolitan System,' in Ithiel
de Sola Pool, ed., The Social Impact of the Telephone
(Cambridge, Mass., 1977). Also, McNeal, Independent
_T_e_l_e_p_h_o_n_y_, 81-84."
41. Ibid., p. 248. "James B. Hoge, `National Inter-State
Telephone Association,' The Telephone Magazine (July 1905):
34."
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 13 -
up to Bell's competitive use of long-distance lines.... To combat
Bell's head start in long-distance telephony and its advantages
in system engineering, midwestern promoters also formed an
association. With strong support from non-Bell manufacturing
concerns, the Interstate Independent Association helped to
overcome the limitations small size imposed on many competing
firms. The organization started a clearing house to handle toll
receipts and pooled resources to build main trunk lines to big
cities."42
Why, may one ask, did the Interstate Independent Association not
survive to become a national long-distance network in competition
with AT&T ? Was it the doing of the so-called natural monopoly
nature of telecommunications ? Or could it have been the fact
that the Bell System had established exclusive franchises to
operate in all the major high-volume cities "such as New York,
Chicago, and St. Louis, and used profits from [government-
enforced] monopolized intercity markets to subsidize price wars
in competitive local ones...."43 ? In fact, the Interstate
Independent Association "tried to bring political pressure to
bear to overcome Bell's dominance of the Illinois Tunnel Company,
the body that controlled access to Chicago's underground
conduits.44 Bell [via city hall] had been successful in keeping
the city's conduits closed to competing firms, shutting them out
of the key juncture point for long-distance service in the
Midwest. Ultimately, the association failed to crack Bell's
[government-enforced] monopoly in the city."45
It would be erroneous from the evidence presented that the
formation of one "monopoly" telephone network in the United
States was the product of the natural monopoly nature of
telecommunications when you consider the fact that the Bell
System had been given exclusive franchises in many key high-
volume cities such as New York, Chicago, and Saint Louis and had
used the profits from these areas and the intercity trunk routes
__________
42. Ibid., p. 105.
43. Ibid., p. 123.
44. Ibid., p. 248. "AT&T Archives, box 1337, Interstate
Independent Telephone Association, 1902, to Meany, 11
December 1902."
45. Ibid., p. 106.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 14 -
connecting these areas "to subsidize price wars in competitive"
local markets.
It seems clear now how in the United States, one telephone firm
was able to establish a "monopoly" situation, thus causing only
one major telephone network to occupy the field. The formation
of one "monopolistic" telephone network came about not because of
the free market or the so-called natural monopoly nature of
telecommunications, but because of the opposite principle -
governmental intrusions into the free market.
It is very possible, then, that a telephone firm that has
business entities operating under conditions where no competitors
are allowed to enter (and can thus charge exorbitant prices) can
go ahead and use the profits from the coercive monopoly
enterprises to subsidize price wars in other areas with other
telephone firms that do not have coercive monopoly enterprises.
In time, the firms that do not have coercive monopoly enterprises
will fade away either by going out of business or selling to the
larger firm.
In this country, the process of having only one major
"monopolistic" telephone network was accelerated even more when
the Bell System, under President Vail, announced in 1909 - 1910
that it would welcome public regulation of the telephone
industry. "Regulation [, though,] is a two-sided coin: on one
side [, the first series of objectives,] lies the aspect of
public protection - profit limitations, the obligation to provide
service at nondiscriminatory rates, and so forth. The other side
of the coin [, the second series of objectives,] bears the aspect
of utility protection - including bars to competitive entry,
exclusive franchise, and the right of eminent domain. With an
insight that was to serve Bell corporate interests well, Vail
anticipated the limited inroads that public regulation would make
in obtaining the first series of objectives and the extensive
benefits conferred by the second. Real power would always rest
with those responsible for management of telephone operations,
and Vail was always insistent on the distinction between
`regulation' and `management' Although the program of acquiring
independent properties was being pursued unabated, the combined
objective of `Universal Service - One System, One Policy' could
not be achieved without political intervention. Bell's response
to this limitation was the promotion of regulatory authority in
utility commissions."46
Copyright 1992 by Franklin Perez. All rights reserved. No part of
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without permission in writing from the author.
- 15 -
"Other paths were possible [for telephony development in the
United States if no exclusive franchises had been given within
any geographical regions and the laws of the free market were
allowed to prevail]. Local companies in the South and Midwest
could have kept large blocks of... [customers] beyond Bell
System reach, cooperating to form an alternative to AT&T's [long-
distance service]. As late as 1907 independents carried 20
percent of all toll calls, mainly in the midsized city market.47
In addition, several large financiers from the East almost
extended capital to the independents to help them wrest control
of major cities from Bell as well."48
3.3 Technical Nature of Telecommunications Leads To Monopoly
Firm
One argument in favor of the natural monopoly view of
telecommunications states that "simple economies of scale in the
provision of a standardized service dictate that one firm...
[will eventually wind up] provid[ing] that service"49 if the laws
of free market economics were allowed to proceed "because it is
[more] technically efficient to have a single producer or
enterprise."50 Even if this were true for telecommunications,
which in my opinion seems doubtful considering what has been
written in the section "Natural Monopoly Theory Assumes
Essentially Free Market," Milton Friedman, winner of the Nobel
Prize in Economics, notes that a private monopoly may be the best
alternative. Milton Friedman states the following:
__________
46. Richard Gabel, "The Early Competitive Era in Telephone
Communication, 1893-1920," Law and Contemporary Problems 34
(Spring 1969): 356 - 357.
47. Kenneth Lipartito, The Bell System and Regional Business: The
Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins
University Press, 1989), p. 256. "Bureau of the Census,
Telephones and Telegraphs, 1912, table 28, p. 38."
48. Ibid., p. 146.
49. Ibid., p. 151.
50. Milton Friedman, Capitalism and Freedom (Chicago: The
University of Chicago Press, 1982), p. 28.
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without permission in writing from the author.
- 16 -
1. "When technical conditions make a monopoly the natural
outcome of competitive forces, there are only three
alternatives that seem available: private [unregulated]
monopoly, public [government-owned] monopoly, or public
regulation [of a privately-owned government-enforced
monopoly].... [Which is the best among all these three
alternatives ?] Henry Simons, observing public regulation
of monopoly in the United States, found the results so
distasteful that he concluded public monopoly would be...
[the best option]. Walter Eucken, a noted German liberal,
observing public monopoly in German railroads, found the
results so distasteful that he concluded public regulation
would be... [the best option]. Having learned from both,
I... conclude that, if tolerable, private monopoly may be
the... [best option]."51
2. "If society were static so that the conditions which give
rise to a technical monopoly were sure to remain, I would
have little confidence in this solution. In a rapidly
changing society, however, the conditions making for
technical monopoly frequently change and I suspect that
both public regulation and public monopoly are likely to be
less responsive to such changes in conditions, to be less
readily capable of elimination, than private monopoly."52
3. "Railroads in the United States are an excellent example. A
large degree of monopoly in railroads was perhaps
inevitable on technical grounds in the nineteenth
century.53 This was the justification for the Interstate
Commerce Commission. But conditions have changed. The
emergence of road and air transport has reduced the
monopoly element in railroads to negligible proportions.
__________
51. Ibid., p. 28.
52. Ibid.
53. I tend to disagree with this statement. I think that a major
reason for the monopolistic behavior of some railroads was
due to the issuing of exclusive franchises to railroads, most
notably the Central Pacific in California. See Ayn Rand,
Capitalism: The Unknown Ideal (New York: The New American
Library, 1964), pp. 102 - 109. See also Burton W. Folsom,
Jr., The Myth of the Robber Barons (Herndon, Virginia: Young
America's Foundation, 1991), pp. 17 - 39.
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without permission in writing from the author.
- 17 -
Yet we have not eliminated the ICC. On the contrary, the
ICC, which started out as an agency to protect the public
from exploitation by the railroads, has become an agency to
protect the railroads from competition by trucks and other
means of transport, and more recently even to protect
existing truck companies from competition by new
entrants.... If railroads had never been subjected to
regulation in the United States, it is nearly certain that
by now transportation, including railroads, would be a
highly competitive industry with little or no remaining
monopoly elements."54
I believe that if such a private non-coercive monopoly does
develop, it should be "tolerated."
"[I]f one considers the only kind of monopoly that can exist
under capitalism, a non-coercive monopoly, one will see that its
prices and production policies are not independent of the wider
market in which it operates, but are fully bound by the law of
supply and demand; that there is no particular reason for or
value in retaining the designation of `monopoly' when one uses it
in a non-coercive sense; and that there are no rational grounds
on which to condemn such `monopolies.'"55
Remember, a "`coercive monopoly' is a business concern that can
set its prices and production policies independent of the market,
with immunity from competition, from the law of supply and
demand. An economy dominated by such monopolies would be rigid
and stagnant."56
"The necessary precondition of a coercive monopoly is closed
entry - the barring of all competing producers from a given
field. This can be accomplished only by an act of government
intervention, in the form of special regulation [favoring the
entrenched firms], subsidies, or [exclusive] franchises. Without
government assistance, it is impossible for a would-be monopolist
to set and maintain his prices and production policies
__________
54. Milton Friedman, Capitalism and Freedom (Chicago: The
University of Chicago Press, 1982), p. 29.
55. Ayn Rand, Capitalism: The Unknown Ideal (New York: The New
American Library, 1966), pp. 74 - 75.
56. Ibid., p. 68.
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without permission in writing from the author.
- 18 -
independent of the rest of the economy. For if he attempted to
set his prices and production at a level that would yield profits
to new entrants significantly above those available in other
fields, competitors would be sure to invade his industry."57
"It takes extraordinary skill to hold more than fifty percent of
a large industry's market in a free economy. It requires unusual
productive ability, unfailing business judgement, unrelenting
effort at the continuous improvement of ones's product and
technique. The rare company which is able to retain its share of
the market year after year and decade after decade does so by
means of productive efficiency - and deserves praise, not
condemnation."58
"Now if a company were able to gain and hold a non-coercive
monopoly, if it were able to win all the customers in a given
field, not by special government-granted privileges, but by sheer
productive efficiency - by its ability to keep its costs low
and/or to offer a better product than any competitor could -
there would be no grounds on which to condemn such a monopoly. On
the contrary, the company that achieved it would deserve the
highest praise and esteem."59
4. Effects of the Public Utility Paradigm in Telecommunications
"For much of this century, fairness and efficiency in American
telecommunications have been sought through the public utility
paradigm of governmental regulation.60 The paradigm is expressly
premised on the assumption that the industry constitutes a
`natural monopoly' in which a single entity can provide better
service at lower costs than a number of competing suppliers.61
__________
57. Ibid.
58. Ibid., p. 66.
59. Ibid., p. 75.
60. Mark S. Fowler, Albert Halprin, and James D. Schlichting,
"`Back to the Future:': A Model for Telecommunications,"
Federal Communications Law Journal Vol. 38, No. 2 (August
1986): 150. " See generally G. Brock, The Telecommunications
Industry 158-61, 177-99 (1981)."
61. Ibid.: 150. "2 A. Kahn, The Economics of Regulation 2, 146
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without permission in writing from the author.
- 19 -
Under the public utility paradigm, it is thought to be both more
efficient and more fair for government to grant an exclusive
franchise to one company than to let market forces reign. The
governmentally bestowed monopoly, however, creates strong
incentives for overpricing and reduced output of the monopoly
services.62 In addition,... governmentally granted market power
can be used to leverage other markets through anticompetitive
conduct, such as the discriminatory provision of regulated
services to competitors and their customers in these other
markets or the cross-subsidization of competitive offerings
through improper cost allocation between regulated and
unregulated services."63
"The public utility paradigm employs intrusive governmental
regulation to combat these possible harms. To prevent the reduced
output of monopoly services, the public utility paradigm strictly
controls entry and exit, closely regulates both the prices and
the conditions of service, and imposes an obligation to serve all
applicants under reasonable conditions.64 The use of
governmentally granted market power to leverage other markets is
prevented by setting prices for regulated services and by
severely restricting the utility's participation in competitive
markets."65
"The public utility paradigm has incorporated a number of
specific regulatory practices to implement entry/exit regulation
and rate-of-return ratemaking in telecommunications. First, costs
that are joint or common to more than one service66 and local
plant costs have been recovered from telephone services according
to social and political objectives, with little regard for the
_________________________________________________________________
(1971)."
62. Ibid.: 150. "See, e.g., Averch and Johnson, Behavior of the
Firm under Regulatory Constraint, 52 Am. Econ. Rev. 1053
(1962)."
63. Ibid.: 150.
64. Ibid.: 151.
65. Ibid.: 151.
66. Ibid.: 151. "For an explanation of joint and common costs,
see page 168 and note 61 below."
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without permission in writing from the author.
- 20 -
social welfare benefits of economic efficiency. Second,
uneconomically slow depreciation of investment has artificially
depressed current rates while maintaining a high level of
investment on which companies have earned a return. Third,
widespread averaging of costs and rates has allowed a nationwide
sharing of the costs of wiring the entire country for universal
service,67 but has greatly limited telephone companies'
incentives to run their operations efficiently. Finally, possible
anticompetitive use of governmentally granted market power was
not merely restrained, but affirmatively prohibited under the
1956 Consent decree, barring AT&T, which through its Bell System
affiliates had also become the preeminent local exchange carrier,
from engaging in any business other than the provision of common
carrier communications services.68 "69
"An important, although not immediately apparent, effect of a
national telecommunications monopoly subject to government
regulation has been the imposition of significant direct and
indirect (or opportunity) costs on society. The public utility
paradigm has exacted significant efficiency costs in resource
allocation: distorting investment decisions, limiting private
incentive to innovate with new technology, and worse,
affirmatively discouraging innovation that would render obsolete
vast amounts of embedded equipment that is included in the rate
base. Moreover, regulation has tended to discourage price
competition and provided only limited incentives to cut costs or
increase management efficiencies. Regulation has tended as well
to limit the choices available to consumers: regulatory price
__________
67. Ibid.: 152. "Universal service was also achieved through the
Rural Electrification Act of 1936, which provided additional
funds to provide service to rural areas of the country. _S_e_e
7 U.S.C. ... 901 et seq. (1982)."
68. Ibid.: 152. "Similarly, Western Electric, AT&T's wholly owned
equipment manufacturing subsidiary, was precluded from
manufacturing equipment other than the type of equipment used
by the Bell System for furnishing common carrier
communications services. AT&T and Western Electric also were
required to license their patents to all applicants upon
payment of appropriate royalties. _S_e_e United States v.
Western Electric Co., 1956 Trade Cas. (CCH) 1 68,246 (D.N.J.
Jan. 24, 1956)."
69. Ibid.: 152.
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this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 21 -
ceilings prevent the supply of higher-quality, higher-priced
offerings; regulatory price floors discourage the supply of low-
quality inexpensive options that many consumers would find
attractive. Furthermore, it has limited the ability of market
participants to respond quickly to changes in demand and supply.
Regulation also tends to react much more slowly than the
marketplace to the changing reality of technology.70 In addition,
substantial private and public resources have been spent simply
administering the entire regulatory system. Finally, regulatory
ratemaking not only has led to significant direct administrative
costs, but also has been subject to serious practical
difficulties, making terribly elusive the goal of keeping prices
close to costs.71 "72
"Perhaps the most costly aspect of traditional public utility
regulation, however, has been its self-perpetuating character. It
is impossible to test [completely] its central premise - that
telecommunications is a natural monopoly - for regulation itself
erects barriers to entry and provides existing firms with the
opportunity to block or delay the plans of a firm wishing to
offer a new product or service or to enter a new market.73 The
costs and delays inherent in obtaining regulatory approval for
such entry undoubtedly have led many firms to avoid entering the
market when they were otherwise ready, willing, and able to
provide a service or product that consumers would buy at market
price."74
__________
70. Ibid.: 152. "A primary effect of regulation is, in fact, to
slow down change. It has been argued that the pace of
progress under regulation will be determined by existing
firms, with the ability of new firms to make changes reduced
or eliminated. See G. Brock, supra note 7, at 14-15. See
also V. Goldberg, Regulation and Administered Contracts, 7
Bell J. Econ. 426 (1976)."
71. Ibid.: 153. " See G. Brock, supra note 7, at 15-16."
72. Ibid.: p. 153.
73. Ibid.: 153. " Id. Existing firms can also create barriers to
entry by such methods as building excess capacity. Id. at
25-34."
74. Ibid.: 153.
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without permission in writing from the author.
- 22 -
It is clear that public regulation of the telephone industry has
been harmful. As an aside, it is worth mentioning that public
regulation of any industry is harmful. The most notable examples
are the airline, airmail transport, taxicab, railroad,
automobile, trucking, electric utility, natural gas, banking,
securities, broadcasting, food and beverage, building and
housing, pharmaceutical, and insurance industries.75
5. Free Market Telecommunications Environment
"[R]ecent changes in telecommunications regulation suggest that
the time has come to replace the traditional public utility
paradigm of government regulation with a competitive industry
paradigm. The effects of the recent injection of competition into
significant segments of interstate telecommunications, the
benefits flowing from deregulation in other industries formerly
regulated as public utilities, and the promise of new
technologies on the brink of realization all demonstrate the
necessity for changing our model for telecommunications....
[T]elecommunications should become a ... competitive marketplace
in which competition drives prices to costs and lowers costs to
the minimum, in which products and services are provided whenever
end users are willing to pay the necessary costs of
production.... Realization of these efficiency benefits of
competition will provide greater value in the future for every
telecommunications dollar."76
"The benefits of competition in the markets for CPE and
interexchange communications are clearly evident today. It is
indisputable that the market for telecommunications equipment is
vigorously competitive, with numerous well-financed ventures
holding significant market shares.77 AT&T's predominant market
__________
75. Bernard H. Siegan, Economic Liberties and the Constitution
(Chicago: University of Chicago Press, 1980), pp. 288-300.
76. Mark S. Fowler, Albert Halprin, and James D. Schlichting,
"`Back to the Future:': A Model for Telecommunications,"
Federal Communications Law Journal Vol. 38, No. 2 (August
1986): 158.
77. Ibid.: 158. "See Customer Premises Equipment, 100 F.C.C.2d
1298, 1313-16 (1985); Furnishing of Customer Premises
Equipment and Enhanced Service, Order, 102 F.C.C.2d 655
(1985) [hereinafter cited as AT&T Structural Relief Order],
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without permission in writing from the author.
- 23 -
share of the new private branch exchange (PBX) and key system
markets has declined drastically in the last few years so that it
no longer can be said to dominate any segment of the equipment
marketplace.78 The benefits of such competition are palpable. It
is estimated that sales revenues in the CPE market increased by
nearly 50% between 1983 and 1985.79 More than 2000 vendors are
supplying end users with $14 billion worth of terminal
equipment.80 The introduction of competition has also provided
consumers with a wider variety of CPE options and with less
expensive alternatives than existed in the earlier monopoly
market. Consumers can obtain such new CPE features as automatic
redial, hold, and other call-handling options. A wide variety of
new terminal equipment has also appeared, including wireless
telephony, customized dialing, and other speciality phones, as
well as varieties of decorator phones. It is estimated, for
instance, that there are currently 3 million cordless telephones
in use. The benefits for business users have also been
substantial; PBX and key system prices have been dropping.81
Nevertheless, the capabilities of business CPE have increased,
with such features as high-speed facsimile and integrated data
and voice capabilities now being commonplace."82
_________________________________________________________________
aff'd in principal part on recon. Memorandum Opinion and
Order on Reconsideration, FCC 86-34] (released Aug. 7, 1986)
[hereinafter cited as AT&T Structural Relief
Reconsideration]."
78. Ibid.: 159. "See AT&T Structural Relief Order,... 102
F.CcC.2d at 676-77."
79. Ibid., 159. "Telecommunications: A Market Profile, Wall St.
J., Feb. 24, 1986 @ 4 (Telecommunications Special Report), at
5D."
80. Ibid.: 159. "See Furnishing of Customer Premises Equipment
by the Bell Operating Telephone Companies, Notice of Proposed
Rulemaking, FCC 86-113, para. 32 (released Mar. 28, 1986)
[hereinafter cited as BOC Structural Relief NPRM]."
81. Ibid.: 159. "Zorpette, The Telecommunications Bazaar, IEEE
Spectrum, November 1985, at 59 & 61. For instance, the
average wholesale price of a key system has dropped from $300
per unit in 1983 to $225 in 1985. Id. at 59."
82. Ibid.: 159.
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without permission in writing from the author.
- 24 -
"It is also apparent that the interexchange market is well on the
way to complete competition. The majority of Americans now have a
choice of long-distance carriers. A number of competitors with
substantial resources have obtained significant market shares in
a few short years. Because of the advent of these competitors and
movement toward more rational economic pricing of regulated
services,83 usage rates for interstate MTS and WATS services have
decreased more than 20% in two and one-half years, stimulating
significant additional usage of the public switched network.84
With the achievement of `equal access' for long-distance
competitors,... the shape of the interexchange market should be
determined primarily by competitive forces.85 "86
__________
83. Ibid.: 159. " See infra pages 167-83."
84. Ibid.: 159. "Press Release, `Interstate Long Distance Rate
Reductions Worth More Than $2 Billion Become Effective,"
Mimeo No. 4871 (released May 30, 1986)."
85. Ibid.: 160. "The Commission recently determined that current
policies governing competition in the interexchange
marketplace and the transition to equal access are
fundamentally sound. See OCC Joint Petition for Expedited
Rulemaking. Notice of Proposed Rulemaking, 50 Fed. Reg.
50,316 (1985) [hereinafter cited as OCC NPRM]. The Commission
is committed, however, to taking all actions needed to ensure
a level playing field for competition in this market. See
Separate Statement of Chairman Mark S. Fowler, id. at
50,328-29. For example, the Commission has addressed a number
of transitional problems resulting from the presubscription
process under which customers select their primary
interexchange carrier before conversion of their telephone
company central office to equal access. In particular, the
Commission found that the routing to AT&T of all traffic from
customers who fail to presubscribe was unreasonable and
discriminatory. It mandated instead a uniform pro rata
allocation plan that became effective May 31, 1985. Moreover,
the Commission resolved a number of questions related to
presubscription, including, inter alia, the controlling
indication of customer choice, the retroactive allocation of
customers converted to equal access prior to the default
order, and the applicability of charges for customers
requesting changes to their initial presubscription. See
Investigation of Access and Divestiture Related Tariffs, 101
F.C.C.2d 911, modified on recon., 102 F.C.C.2d 503 (1985)."
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without permission in writing from the author.
- 25 -
Opening up the local loop to competition by allowing more than
one wire to the home will open up the local exchange market.
There is no reason that I can think of why this would not be
feasible under our current technology. As a possible
implementation using "copper wire" technology, one could have
poles along public streets which are owned by the state or local
government, and then have many cables from different local
exchange companies sharing the same poles. At the same time, you
could have the various local exchange companies set up their own
poles along private property; as an incentive for an owner to
allow a telephone pole in his/her own private property, the local
exchange could give the owner X dollars' worth of free telephone
calls. What you would have is a situation where, within one
geographical area, several exchanges offer local telephone
service with trunk connections to different competing telephone
networks; and with today's microwave/radio technology those
trunks would be even easier to establish with various networks
since there are no right-of-way problems. The telephone user
when making a call could always indicate over what network to
make the call in the PIC portion of the called digits. There
would develop a symbiotic relationship between the local exchange
companies and the telecommunications network companies. It would
be in the interests of the local exchange companies to connect
with as many telephone networks as possible, and it would be in
the telecommunications network companies' interests to connect to
as many local exchanges as possible. Central office switches
could even be set up in apartments and homes. Having nearby
neighbors connected via wire, or even more convenient wireless
local loop, to the central office switch is entirely possible in
a competitive telecommunications industry with our current
technology. The development of cellular technology for the local
loop would probably even fix the problem of being able to access
more than one local loop as well as the telephone pole problem.
Also, the cable company wire to the home could potentially serve
as a second local loop.
"It... [definitely] appears that developing technologies and
financial innovation... [will] make the competitive industry
paradigm the most appropriate long-term model for the local
exchange markets. Those markets still must be considered
[government-enforced] monopoly markets [with respect to the
hardwire local loop] in most areas. They have, at least until
now, experienced the least amount of technological innovation.
_________________________________________________________________
86. Ibid.: 160.
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- 26 -
Limited local exchange competition, however, has already begun to
appear.87 Digital Termination Systems (DTS), a microwave digital
service, has been introduced in several cities for data
transmission. Cellular radio systems have begun to operate in a
number of cities across the country and will be extended into
hundreds of additional cities.... As cellular technology advances
and costs are reduced, cellular systems may become direct
competitors of local exchange carriers. Similarly, fixed
microwave or cellular systems may prove to be more efficient for
hooking up end users in rural states than traditional copper
wire. At least some interexchange carriers have begun to provide
interexchange access service directly to end users in competition
with the local exchange carrier. Some real estate developers have
started placing electronic switches in multitenant buildings to
provide tenants with more efficient access to the local exchange
carrier's central office and to various interexchange carriers.88
Apartment buildings with master antennas and cabling for TV
should also be providing local telephone service in the near
future. Competition is likely to develop between cable companies
and local exchange carriers for the provision of local voice,
data, and video services as the telephone companies lay more
wide-band capacity and institute an Integrated Services Digital
Network (ISDN), and the cable companies begin installing switches
in their existing systems.89 "90
__________
87. Mark S. Fowler, Albert Halprin, and James D. Schlichting,
"`Back to the Future:': A Model for Telecommunications,"
Federal Communications Law Journal Vol. 38, No. 2 (August
1986): 161. " See, e.g., Pepper, Competition in Local
Distribution: The Cable Television, in Understanding New
Media: Trends and Issues in Electronic Distribution of
Information 147 (B. Compaine ed. 1984)."
88. Ibid.: 161. " See, e.g., Aronow, Smart Buildings and Shared
Tenant Services: A Preliminary Analysis, 37 Fed. Com. L.J.
521 (1985)."
89. Ibid.: 162. "An ISDN would provide end-to-end voice and data
communications through the same digital transmission media.
At present the Communications Act prohibits telephone
companies from providing video programming directly to
subscribers in their telephone service areas. 47 U.S.C.A. @
613(b)."
90. Ibid.: 162.
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- 27 -
"The appearance of competitive markets throughout the
telecommunications industry will allow a maximization of public
benefits.... As competition invades the entire marketplace,
producers will have to price their services at cost and to lower
costs as much as possible, or risk losing customers. This
efficient telecommunications pricing system could well reduce the
use of averaging, allowing prices to vary more directly with the
marginal costs of serving customers.91 At a minimum, it appears
likely that firms will find it necessary to treat customers or
classes of customers with reasonable marketplace alternatives,
and therefore high demand elasticities, on a special basis in
order to retain them on the network. Many carriers are likely to
employ two-part tariffs, with lump-sum access charges for non-
traffic-sensitive costs of the local loop and separate usage-
sensitive charges for traffic-sensitive costs. As in other
competitive markets, a firm's ability to judge accurately the
relative cost efficiencies of various pricing alternatives will
be an important factor determining its success in the
marketplace. Only firms using the most efficient methodologies
will ultimately be able to provide the greatest values to
consumers and thus survive the discipline of the marketplace."92
"Besides precipitating changes towards more rational pricing of
telecommunications products and services, the advent of a
competitive marketplace will leave no companies with sufficient
market power to present a significant danger of anticompetitive
behavior. Whenever a firm attempts to engage in improper cost-
shifting or to discriminate against competitors, it will run
serious risks of losing customers and revenues. Regulation to
constrain such acts simply will be unnecessary."93
"The significant increase in technological and financial
innovation caused by competition in telecommunications may also
__________
91. Ibid.: 162. "Kahn, supra note 6, at 149. Of course, the
entire fragmentation of the network by individual customer is
unlikely to occur because it would be administratively
inefficient. Most businesses in competitive markets today use
some averaging techniques to achieve administrative or
transactional efficiencies that may more than counterbalance
losses from pricing inefficiencies."
92. Ibid.: 162.
93. Ibid.: 162 - 163.
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- 28 -
in fact resolve the chief fairness issue in telecommunications
today, ensuring that everyone who desires telephone service can
obtain it at an affordable price. Competition may drive prices
and costs so low that no need will exist for subsidies for
telephone service to any American consumer."94
"Thus, achievement of a competitive world in telecommunications
promises enormous benefits in efficiency and fairness. Prices
will accurately reflect costs, leading to the production of goods
and services only when there are consumers willing to pay those
costs. All companies will find it necessary to reduce costs to
the minimum, seeking more efficient methods of organizing the
production of telecommunications services. Both these
developments will advance fairness in the industry. No longer
will certain classes of ratepayers be required to contribute the
costs of providing services to others who have the ability to pay
for them. And no longer will the costs to society of providing
universal service be significantly higher than necessary."95
6. Conclusion
"In a sense all business enterprise is a flight from competition.
The penalties of competition - low or nonexistent profits - may
be avoided by superior efficiency, by product innovation or
differentiation, or by attenuation of the competitive process
through [(a)] control over supply and price wielded
monopolistically [through exclusive franchises] or [(b)] through
conspiracy or tacit understanding with competitors. Confronted by
the vigorous competitive inroads of independent operating
companies, the Bell System sought to escape the unaccustomed
hardships of competition by acquiring competitors [, who were not
allowed by law into certain high-volume, profitable cities that
Bell was serving], by limiting their markets and their services,
and by espousing the development of governmental regulatory
functions. The public service commissions, which ultimately
stabilized rates and earnings, adopted the norms of business
policy urged by the [Bell] System and imposed strictures on the
`unintelligent competition.' The advantages thus gained by the
Bell System over its remaining competition have been parleyed
into a practically unassailable market position fortified by
__________
94. Ibid.: 163.
95. Ibid.: 163.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 29 -
political and legal ramparts [up to the year 1984, which was when
the MFJ agreement was reached with Judge Green.]"96
"[T]elephone competition during the years 1893 - 1920 was neither
inefficient nor costly but was, on the contrary, productive of
benefits sharply outweighing the costs. It was not... the working
out of the competitive market process toward the emergence of
inevitable `natural' monopoly which destroyed the structure that
permitted competition to flourish and its benefits to be enjoyed;
it was... [(1) the issuing of exclusive franchises to the Bell
System at many of the key high volume cities and (2)] a poorly
conceived, Bell-inspired, protectionist regulatory policy which
failed to preserve such competition...."97
We should seriously start moving towards a formal deregulation
plan for the telecommunications industry, even up to the local
loop. Given today's technology and the evidence presented
pertaining to telephony history and public regulation, there is
no excuse for keeping the local wire loop owned by a government-
enforced, publicly regulated, private monopoly telephone firm or
for that matter, any part of the telecommunications industry.
As a general aside, the leaders of the telecommunications
industry should seriously consider supporting a constitutional
amendment that advocates the separation of State and Economics in
order to take away the authority of government officials to give
exclusive franchises or special subsidies. "If men are concerned
about the evils of monopolies, let them identify the actual
villain in the picture and the actual cause of the evils:
government intervention into the economy. Let them recognize that
there is only one way to destroy monopolies: by the separation of
State and Economics - that is, by instituting the principle that
the government may not abridge the freedom of production and
trade."98 This will not only help the telecommunications
industry, but help other industries and the nation as well.
__________
96. Richard Gabel, "The Early Competitive Era in Telephone
Communication, 1893-1920," Law and Contemporary Problems 34
(Spring 1969): 358.
97. Ibid.: 358 - 359.
98. Ayn Rand, Capitalism: The Unknown Ideal (New York: The New
American Library, 1966), pp. 76 -77.
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
- 30 -
Franklin Perez
Copyright 1992 by Franklin Perez. All rights reserved. No part of
this document may be reproduced, in any form or by any means,
without permission in writing from the author.
