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The AT&T Divestiture: Was It Necessary? Was It a Success?

Slide 1

The AT&T Divestiture: Was it Necessary?
Was It a Success?

Robert W. Crandall
The Brookings Institution

U.S. Department of Justice
March 28, 2007

Slide 2

Little Empirical Evidence that Section 2 Decrees Have Improved Consumer Welfare

  • In reviews of major monopolization cases, Crandall (2001) and Crandall and Winston (2003) find little evidence of consumer benefit from structural remedies.
  • Similar lack of benefits found by Crandall and Elzinga (2004) in examination of injunctive relief.
  • No empirical evidence of increased output or lower prices following imposition of the decrees in 18 of 19 cases studied.
  • Robert W. Crandall (2001), “The Failure of Structural Remedies in Sherman Act Monopolization Cases,” Oregon Law Review, Vol. 80, Spring, pp. 109-198.
  • Robert W. Crandall and Clifford Winston (2003), “Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, Journal of Economic Perspectives, Vol. 17, Fall, pp. 3-26.
  • Robert W. Crandall and Kenneth G. Elzinga (2004), “Injunctive Relief in Sherman Act Monopolization Cases,” in John B. Kirkwood (ed.), Antitrust Law and Economics, Vol. 21, pp. 277-344.

Slide 3

U.S. v. AT&T (1982) Is Generally Viewed as Most Successful of Major Section 2 Cases

  • The 1982 AT&T decree is the major (apparent) exception.
  • The decree required vertical divestiture of Bell operating companies and equal-access obligations for divested local companies.
  • Near-term result: long-distance services increased and U.S. long distance rates fell.
  • But was increased long distance competition due to vertical divestiture?

Slide 4

The Monopoly Bottleneck in U.S. v. AT&T

  • AT&T’s local telephone monopolies accounted for 80-85% of access lines in 1982
  • Section 2 case focused on use of these monopoly “bottlenecks” to extend monopoly into long-distance and terminal-equipment markets
  • “Inverse Ramsey” regulatory pricing of local and long distance services created incentives for entry and for AT&T to attempt to block it.
  • But was vertical divestiture, i.e., isolation of the network monopoly bottleneck, necessary to obtain competitive results in long distance and terminal equipment?

Slide 5

The Decree Appears to Have Worked

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Despite the Apparent Success of AT&T Decree, No Other Country Pursued Vertical Divestiture

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Long Distance Rates Fell More Rapidly in EU and Canada without Divestiture

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U.S. Long Distance Rates Fell Largely Because FCC Reduced Switched Access Rates

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Competition in Long Distance Market Did Not Require “Isolating the Bottleneck” through Vertical Divestiture

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“Isolating the Bottleneck” Was Costly and Difficult to Administer

Slide 11

FCC and AT&T Decree Failed to Anticipate the Role of Wireless Competition

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Wireless Provided the Greatest Impetus to U.S. Long Distance Competition

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The “Price” for Ending the AT&T Decree Was the 1996 Telecommunications Act

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Eight Years of Network Sharing Under the 1996 Act Did Not Produce Meaningful Competition

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After Twelve Years of the AT&T Decree and Nine Years under the 1996 Act, Telecom Is Vertically Integrated Once Again

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The Irrelevance of the Bottleneck Today

Slide 17

The Lessons Learned


Updated January 5, 2024