An oligopoly analysis of AT&T's performance in the wireline long-distance markets after divestiture.(The Enduring Lessons of the

Did AT&T, in this last stage of its existence, conspire with the FCC to set LD joint monopoly prices? Its Lerner Index values clearly resulted from a new collective strategy (i.e., a value of V>0). In most years, the estimate of conjectural variation increased to greater than 1.0, indicative of a joint strategy to set the price level. Given a market share of 0.4 and the Lerner Index at 0.88, the conjectural variation coefficient had to exceed 1.5 for monopoly. (7) In line with the 1997-2004 data, the average V equaled 1.2 for standard plan wireline and 0.9 for discount plans in place. In standard plan service, while that service was in decline, AT&T had prices approaching monopoly levels. While in discount plans, where price-sensitive customers migrated to wireless in large numbers, prices were not at those levels.

In a November 2005 speech to the people of AT&T, the CEO expressed the current condition succinctly, saying, "the old business we had worked fine with much higher price levels" leaving out the words "standard plan," but noting that with the shift out of old business to discount plans and wireless, "we have serious trouble given the direction prices [are] headed." He put it another way that was even more illuminating, "our customers needed what we provided them, but competitive price levels made it impossible for us to make a profit with the cost structure." What the customers "needed" were "new service offerings to create new revenue streams." (8) Broadband waited to be funded, and only monopoly level prices inclusive of the tax would provide those funds.

In the twenty years from 1984 to 2004, the court-initiated implementation process was intended first to structurally separate local acquisition of calls from LD delivery, and second to add to the number of networks independent of AT&T. Whether this was ever expected to result in competitive market performance is unknown. By 2004, specialized common carriers and wireless service providers had achieved the structural part, but with either Cournot oligopoly prices, or with the FCC "inspired" joint tax for monopoly pricing. At that point in time, an industry-wide reversal of this structural condition took place, a merger which sent AT&T back into providing local exchanges, and caused other local operating companies to attach to the leading wireless companies. That series of mergers reversed direction against the structural goals of the 1984 antitrust court and the Justice Department.

This structural reversal brought the case for a divestiture antitrust remedy to an end. At least in this industry, and perhaps in others, the structured fragmentation goal was shelved. There are at least three results from there: (1) the court's resorting in complex antitrust proceedings to settlement between the parties does not remake market structures consistent with the competitive model; (2) conditions of scale and scope inherent in networks work against structural remedies seeking to set a dozen service providers in markets; and (3) specific to bottleneck price controls, provide a compelling incentive for introducing bundled services that make it impossible to use price to monitor performance.

In light of these current conditions, after numerous papers and books on oligopoly and regulation, this is my last inquiry into antitrust and regulation in telecommunications. I cannot work without being able to define markets and prices, to unravel industry performance; and that is no longer possible. One can no longer tell what the oligopoly is doing.

(1.) See Paul W. MacAvoy & Kenneth Robinson, Winning by Losing: The AT&T Settlement and Its Impact on Telecommunications, 1 YALE J. ON REG. 1 (1983).

(2.) See PAUL W. MACAVOY, THE FAILURE OF ANTITRUST AND REGULATION TO ESTABLISH COMPETITION IN LONG DISTANCE TELEPHONE SERVICES 131 (1966); C.f. PAUL W. MACAVOY, THE UNSUSTAINABLE COSTS OF PARTIAL DEREGULATION (2007).

(3.) See MACAVOY, UNSUSTAINABLE COSTS, supra note 2.

(4.) See id.

(5.) With the conventional profit maximizing model, for firm i, in which product levels [q.sub.i] and [q.sub.j] are interactive, then first order conditions for Lerner "L" or price-cost margin for firm "i" ([p.sub.i] - [c.sub.i])/[p.sub.i] = [(qi/Q)(I + [V.sub.i])]/e.

(6.) Federal State Joint Board on Universal Service, Report and Order and Second Further Notice of Proposed Rulemaking, 17 F.C.C.R. 24952, paras. 40-63 (2002).

(7.) With the Lerner Index of 0.88 in residential service markets, demand elasticity of 1.1 and market share of firm i, AT&T, equal to qi/Q=0.40 then 0.88=0.40 (I + V)/1.1 and the estimated V=1.2 The monopoly value of Vis the solution of [S.sub.i](I + V)=1 which here is 1.5.

(8.) David W. Dorman, CEO, AT&T, Corp., Speech to AT&T (Nov. 2005).

Paul W. MacAvoy, Williams Brothers Professor of Management Studies, Emeritus and former Dean, Yale School of Management. Member of the Counsel of Economic Advisors in the Ford Administration.

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