[BETA] Fortnightly

By Michael H. Lee and William A. RosquistThe Vanishing LATA:

Pricing Chasms

and Clashing Markets

for Toll Service

Wide disparities can occur in toll rates within some states (em a legacy of multiple LATAs. Now, with

barriers falling, where will prices go?

When local access and transport areas (LATAs) were introduced a decade ago,1 separate geographic markets emerged for intra- and interLATA long-distance (toll) service. Montana, like many other states, has more than one LATA. Now, Congress has enacted legislation that allows regional Bell operating companies (RBOCs) to enter the interLATA market.2 The two LATA markets will converge; toll rates will change. A new long-distance price equilibrium will emerge, possibly at an unexpectedly low level.

How competitors in this new market will react to the presence of other competitors is as yet unknown. However, their revenues will be affected by converging toll-service rates. Market shares for toll and carrier access services will also be affected.

The Problem: Unsustainable Rate Disparities

The interLATA toll rates are similar for the major Montana interexchange carriers (IXCs) (em AT&T, Sprint, and MCI. However, these toll rates differ from the intraLATA toll rates charged by U S WEST Communications, Inc., sometimes significantly. Table 1 shows the disparities in residential message toll service (MTS) rates between U S WEST and AT&T. Significant differences exist in certain night/ weekend MTS mileage bands, such as the 11 to 16 mile band, where AT&T's rate exceeds U S WEST's by 233 percent.

Such rate disparities probably will not survive once the intra- and interLATA markets become one. Unrestricted competition between suppliers of similar commodities will cause currently disparate prices to converge. A competitive market, or rivalry in noncompetitive markets, cannot sustain the rate disparities we now see.

If the market cannot sustain these disparities, then where will competitive prices settle? Will AT&T's higher rates fall, or will U S WEST see an increase in its

relatively low prices? Unless regulation maintains the rate disparities, a new equilibrium will evolve. The factors that will determine the new price equilibrium include interactions between firms, the market power or dominance of any carrier(s), technological change, scale and scope economies, tolerance for complex rates, customer loyalty, marketing strategies, and regulatory policies. These factors will determine whether the existing time-differentiated and mileage-sensitive rate designs will give way to either a simplified

single rate, or a myriad of customized opaque tariffs.3

In the meantime, U S WEST and AT&T face unequal opportunities. While it is technically possible for AT&T to compete in the intraLATA toll market, U S WEST enjoys a 1+ advantage. And, while currently prohibited from entering the in-region interLATA market, U S WEST can enter and compete in out-of-region markets. The Telecommunications Act of 1996 should create economic parity within three years, however. Once free of LATA boundary constraints, U S WEST, AT&T, and the other IXCs will compete in both local and toll markets to provide end-to-end service.

Simple Case: One Carrier Matches the Other's Rate

As described in more detail in the sidebar ("Model and Parameters"), Table 2 shows what we found