Does Bell Company Entry into Long-Distance Telecommunications Benefit Consumers?

22 Pages Posted: 6 Dec 2002

See all articles by J. Gregory Sidak

J. Gregory Sidak

Criterion Economics, L.L.C.

Jerry A. Hausman

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Gregory K. Leonard

Edgeworth Economics

Abstract

As part of the Modification of Final Judgment (MFJ) that implemented the divestiture of the Bell operating companies (BOCs) from AT&T on January 1, 1984, the BOCs were forbidden to carry telephone calls from one local access and transport area LATA) to another. Although the Telecommunications Act of 1996 superseded the MFJ, it retained the BOCs' interLATA prohibition and established, in section 271, a process - involving each state public utilities commission, the Federal Communications Commission (FCC), and the Department of Justice (DOJ), acting on a state-by-state basis - by which the BOCs could earn regulatory approval to enter the interLATA market within the regions in which they provide local exchange service. As of September 1, 2002, the BOCs had received section 271 authorizations to provide in-region interLATA service in fifteen states.

In this Article, we review the origin of section 271. We explain that the FCC and DOJ did not expect that BOC entry would lower prices for interLATA service. Next, we report an empirical analysis designed to estimate the effect that BOC entry has had in New York and Texas, two states where section 271 authorizations has been given. We have three major findings. First, we find that the average consumer received a savings of 8 to 11 percent on the monthly interLATA bill in the states where BOC entry occurred as compared to "control" states where BOC entry had not occurred. Second, we find that competitive local exchange carriers (CLECs) gained a substantial increase in cumulative share of the local exchange market in states where BOC entry occurred as compared to the control states. Third, we find that the average consumer experienced no significant change in her local bill in states where BOC entry into interLATA service occurred as compared to the control states. These empirical results suggest that BOC entry in New York and Texas has led to consumer benefits in terms of lower interLATA bills and greater effective choice for local exchange services in those states.

We explain how these empirical results are consistent with the economic theory of "double marginalization." Because this economic analysis is not part of the approach that the FCC and the DOJ take with respect to implementing section 271, it is not surprising that these two agencies did not expect price to fall after BOC entry into the interLATA market.

Reprinted from Antitrust Law Journal, vol. 70, no. 2, pp. 463-484 (2002), a publication of the American Bar Association Section of Antitrust Law.

JEL Classification: D4, K2, K23, L4, L5, L9, L96

Suggested Citation

Sidak, J. Gregory and Hausman, Jerry A. and Leonard, Gregory K., Does Bell Company Entry into Long-Distance Telecommunications Benefit Consumers?. Antitrust Law Journal, Vol. 70, No. 2, pp. 463-484, 2002. Available at SSRN: https://ssrn.com/abstract=313207 or http://dx.doi.org/10.2139/ssrn.313207

J. Gregory Sidak

Criterion Economics, L.L.C. ( email )

1717 K Street, N.W.
Washington, DC 20006
United States
(202) 518-5121 (Phone)

HOME PAGE: http://www.criterioneconomics.com

Jerry A. Hausman (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-271a
Cambridge, MA 02142
United States
617-253-3644 (Phone)
617-253-1330 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gregory K. Leonard

Edgeworth Economics ( email )

333 Bush St.
Suite 1450
San Francisco, CA 94104
United States

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