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Fortnightly Magazine - July 15 1997

by one Bell company, Pacific Telesis, shows the firm would supply upwards of 35 percent of all intraLATA service originating in its operating area if (when) permitted to enter this business. If so, then nationwide entry into long distance by the Bell companies could have reduced AT&T's market share below the antitrust threshold, without any artificial restriction in output or increase in market price.

Another Bell company, SBC (which recently merged with Pacific Telesis), ironically is poised to enter the long-distance indsutry through a peculiar, though narrowly rational, merger with AT&T. Public policies that foster such market conduct are unlikely to serve the public interest. t

James A. Montanye is a consulting telecommunications economist. His work last appeared in 1996, under the title, "Give No Credence to Lemons! Some Lessons in Market Research."

1For discussion of oligopoly theory, see for example: Dennis Carlton and Jeffrey Perloff, Modern Industrial Organization, Harper Collins (1990); F.M. Scherer, Industrial Market Structure and Economic Performance, 2nd ed., Rand McNally (1980); Jean Tirole,The Theory of Industrial Organization, MIT Press (1988).

2Paul MacAvoy, The Failure of Antitrust and Regulation to Establish Competition in Long-Distance Telephone Services, MIT Press and AEI Press (1996).

3In MacAvoy's view, the country has been mislead into believing the long-distance industry is competitive, due to the following: a large, but inconsequential, competitive fringe; ubiquitous marketing without meaningful price competition; periodic price reductions attributable to regulatory fiat rather than to competitive pressure; frequent price structure changes without price level reductions; and subscriber shifting among rival carriers in pursuit of elusive savings.

4"Is the 'Dominant Firm' Dominant? An Empirical Analysis of AT&T's Market Power," by Simran Kahai, David Kaserman and John Mayo, Journal of Law and Economics 39 (October 1996): 499-517.

5The Lerner index, which is simply the (absolute value) inverse of the demand price elasticity, provides a relative measure of market power. Market power increases as the index value increases through its theoretical range of 0 to 1.

6148 F.2d 416 (2d Cir. 1945).

7Peter Huber, Michael Kellogg, and John Thorne, The Geodesic Network II, The Geodesic Co. (1992).

8MacAvoy, note 2 above, p. 155; Kahai and others, note 4 above, p. 509; Lester Taylor, Telecommunications Demand in Theory and Practice, Klewer Academic Publishers (1994), p. 17.

9Kahai, Kaserman, and Mayo, note 4 above, p. 514.

10The problem of estimating long-distance marginal costs notwithstanding.

11An "X-inefficiency" is any deviation from the maximization of money profits. See Harvey Leibenstein, "Allocative Efficiency vs. 'X-Efficiency,'" American Economic Review 56 (June 1966).

12"Conjectural variations" are oligopolists' strategic responses to each other's price and output decisions. See MacAvoy, note 2 above, pp. 99-103, 155-157.

13Rent-seeking is systematic pursuit of windfall profits through political means.


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