Unnnatural Competition: Applying the New Antitrust Learning to Foster Competition in the Local Exchange
25 Pages Posted: 21 Dec 1999 Last revised: 27 Oct 2018
This article evaluates the local telephone competition-enhancing provisions of the 1996 Telecommunications Act in light of recent developments in the economic theory of competition and anticompetitive behavior. The basic thesis of the article is that the 1996 Telecommunications Act's attempts to create competition in the local telephone exchange by requiring, inter alia, interconnection between rival carriers, network unbundling by incumbent carriers, resale of services, and a number of other similar obligations, while a good start, do not go far enough. The economic model upon which this portion of the Act is premised is the price theoretic model of neoclassical economics, and in particular the version of price theory brought to prominence by the so-called "Chicago School" in the 1970s and 1980s. This model tends to view competition in static, cost-based terms and tends to discount the possibility of market imperfections or successful anticompetitive behavior. As such, it suggests that removing legal barriers to competition, and otherwise adopting a laissez faire approach to the development of competition, is the optimum regulatory strategy. In recent years, however, a new type of economic learning has emerged, which challenges the assumptions of the Chicago School that unregulated markets will achieve socially optimum results. Using tools such as game theory; models of "strategic behavior," "foreclosure," and "raising rivals' costs"; awareness of network effects; and path dependency theory, this learning has presented a strong case for greater governmental intervention in markets. The implications of this learning for local competition are that simply permitting entry into local telephone markets will not suffice to create viable competition, in light of the incentive and ability of powerful incumbents to thwart competition. Instead, an official policy of actively fostering nascent competition, and temporarily constraining dominant incumbents, may be necessary if competition is to emerge.
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