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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


Slide 6

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


Slide 7

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


Slide 8

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


Slide 9

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


Slide 10

“Isolating the Bottleneck” Was Costly and Difficult to Administer


Slide 11

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


Slide 12

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


Slide 13

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


Slide 14

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


Slide 15

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


Slide 16

The Irrelevance of the Bottleneck Today


Slide 17

The Lessons Learned

 

Updated January 5, 2024