Divestiture

1
Divestiture

• Economics 235 Economics of Telecommunications

2
Neither MCI nor ATT were happy with the FCC's
slow approach to deregulation

• In 1976 ATT presented "Bell Bill" cosponsored by
  16 senators and 175 Congressman.
• Congressman Lionel Van Deerlin introduced his own
  bill in 1978 that was pro-competitive.

3
Antitrust Suit

• MCI filed private suit and DOJ filed public suit
  in 1974.

4
Economic Issues

• 3 separate markets Local, LD, CPE.
• Local - natural monopoly subject to state
  regulation
• LD and CPE - potentially competitive but
  dependent on interconnection with local market.
  (Local bottleneck - everything has to pass
  through bottleneck, and whoever controls it,
  controls the other markets as well.)

5
Specific Charges

• ATT used local market to monopolize other two.
  Hiding behind "network integrity".
• Charged with pricing without regard to cost. Used
  regulatory process to raise costs of rivals and
  prevent competition.

6
ATT's defense

• Claimed that it was exempt because it was
  regulated. It didn't possess market power
  (ability to control prices and entry) because
  regulators had that power.
• Claimed that entire telephone business was a
  natural monopoly with economies of scale, scope
  and vertical integration that would be lost if
  provided by separate companies.

7
Divestiture Settlement

• Called MFJ or Modified Final Judgment.
• Operating theory
• leave competitive or potentially competitive
  business with ATT
• Separate the non-competitive businesses.
• Separated ATT's LD from local but allowed to
  keep Western Electric.

8
Divestiture Settlement contd

• Equal Access mandated.
• Pre-subscription process
• Parties signed agreement August 1982. Became
  effective January 1, 1984.

9
Effects of Divestiture

• Hausman Article

10
Effects of Divestiture contd

• Taylor and Taylor Article