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Weekly UpdatesIn a sense, I think that this result was inevitable because of the improbable alliance between Assistant Attorney General Baxter and Judge Greene. On this occasion, at least, the Chicago school economist (who taught at Stanford) and the progressive democrat were able to work out a common solution on the thinnest of records. For the enormity of this decree, its basis in antitrust law was feeble at best. The single specific instance that provoked the separation was the unwillingness of AT&T to provide forward transmission service that would allow MCI to communicate with customers through Chicago if they did not have a Chicago office. Hence, a phone call that started in St. Louis and was routed to Bethesda, Maryland through Chicago could not use MCI or any other provider for the first leg of the trip and AT&T for the second, unless it also had a Chicago office. Dumb, to be sure, but the kind of issue that could be resolved by having the FCC issue a simple interconnection order, without restructuring the entire system, which, of course, the FCC could never do without some specific congressional authorization.
Judge Greene did not look with favor on that modest alternative, with consequences that soon became clear in unintended ways. This should not come as a surprise, though, since, as a general matter, Judge Greene was temperamentally skeptical of market solutions because he thought that bigness and badness went hand in hand. His distrust of markets led him to shy away from any minimalist approach to antitrust law. Rather, his grander vision of the field was concerned more with large concentrations of wealth than it was with market power--the ability to alter price and retain sales. His heroes were not Robert Bork and Philip Areeda, but Arthur Schlesinger and Ralph Nader. (19) His sins may perhaps be forgiven since he was a self-conscious dissenter to the Chicago School of antitrust. Less forgivable, in a sense, was the failure of Assistant Attorney General Baxter, excellent economist though he was, to be sufficiently skeptical about his ability to understand the full range of structural imperfections that permeated the telecommunications industry no matter how well configured. He was too confident that he understood all that there was to know about network industries, so he too did not seek to focus his remedies on the hold up problems that were suggested by the two-legged telephone call.
Assistant Attorney General Baxter's major structural gambit was to separate the long-lines operation from the local exchange carriers (LECs) because of the risks of cross-subsidies that could otherwise take place in order to block new entrants in the long-lines market. But he failed to see that the elaborate structure that would be created would lead to other tensions, including difficult issues over the relationships between the various LECs and the inability to create effective parity between AT&T--which was subject to regulation under the consent decree--and other long-lines carriers--which were not. Alas, he (and he was not alone) had no conception of how complex the ratemaking issues could turn out to be. Finally, neither Assistant Attorney General Baxter nor anyone else knew how advances in technology would play into the various strictures of the consent decree. Technical advances have a way of shortening the useful life of institutional structures. The years after the 1982 decree saw the rise first of the cell phone, and then of the Internet, both of which have wholly transformed the nature of telecommunications by removing the last vestiges of monopoly power that the LECs had over their respective territories. Yet the entire structure of the 1982 decree and the 1996 telecommunications statute were predicated on the assumption of the permanence of LEC dominance.
Here is one story that helps make the point. As late as 1995 and 1996, I consulted for (then) Bell Atlantic on issues like the application of the "bill and keep" formula to interconnections between land lines and cell phones. Even at that late date, most industry experts regarded cell phones as an expensive luxury that they thought would not displace land lines, at least in the foreseeable future. That is why the 1996 Telecommunications Act treated the LECs as if they had a permanent chokehold over all land lines. After all, the price for cell phone minutes was sufficiently high that most people kept their cell phones turned off unless they wanted to make a call. Most of the traffic between land lines and cell phones originated on cell phones, which created an odd asymmetry in the market such that "bill and keep" would have resulted in a substantial wealth transfer from LECs to cell phone carriers. Yet, ten years later there were more cell phone lines than land lines and the disparity has continued to widen since that time. (20) The land lines in the Epstein household, for example, have declined by fifty percent, from two to one.
The subsequent mergers have shown just how wrong Assistant Attorney General Baxter's original guess was. We have in place vertically integrated networks that both compete and connect with each other. The original structure under the decree has been undone by mergers and technical advances. It is more than symbolic that Southwestern Bell, one of the original Regional Bell Operating Companies (RBOCs), quickly renamed itself SBC in order to shed its local image when it entered the cellular and global markets. As one of the survivors of the massive consolidation within the industry--which neither Assistant Attorney General Baxter nor Judge Greene could have foreseen or tolerated--it acquired the struggling AT&T company, crippled as it was under the 1982 decree, only to change its name from SBC to AT&T. The value of the brand transcended the value of the firm that owned it.
III. STRUCTURAL VERSUS CONDUCT REMEDIES
The unexpected twists and turns in the Bell consent decree raise a theoretical question whose importance is undiminished today. What should guide the choice between the use of structural or conduct remedies in fashioning consent decrees more generally? To set the framework, it is useful to recall the message that this distinction is intended to convey. A structural remedy is most commonly sought in a monopolization case brought under section 2 of the Sherman Act. (21) It seeks to change the form in which the regulated entities do business, by requiring, for example, the breakup of a firm or spin off of a particular subsidiary. Once the structural move is made, regulators may then put in place additional measures to prevent the reformation of the original entity by subsequent corporate maneuvers. These monopolization claims typically involve suits against single firms charging them with a pattern of conduct that has allowed them to acquire improperly a position of monopoly power within a certain industry. The breakup of the Bell System was the outgrowth of a section 2 case, as was the major litigation in the Alcoa case, (22) where the planned breakup was averted by the creation of two new aluminum companies--Reynolds and Kaiser--at the end of the Second World War. The structural remedy was also employed in the endless pursuit which the United States made of the hapless United Shoe Machinery Company. The effort took place over a period that spanned close to seventy years, from the completion of the merger in 1899 to its final dissolution in 1968 as a result of the breakup which cast it into bankruptcy. (23)
The difficulty in dealing with these cases is that it is widely understood that the acquisition of monopoly power, without more, is no more a violation of the antitrust laws than it is a common law tort. Firms that start from nothing and achieve their ends through excellence, acumen, and foresight are entitled to keep the fruits of their labor. (24) That holds true even if the integrated nature of their businesses makes it very difficult for the new entrant to find a chink in the firm's armor that allows them to acquire a foothold in the relevant line of business. One illustration of this system was the conscious effort of United Shoe Machinery Company to merge seven different companies in order to overcome the holdout problems that arose when each firm held patents to equipment used at different stages in the shoe production process. Putting all the companies together in sequence was, in effect, an early version of a patent-pooling device that effectively counteracted the extensive social waste from the standard double marginalization problem.
To each such advance there is a hitch. The moment that one party is able to smooth over the joints in a production sequence, it necessarily disadvantages any competitor that sells equipment only in a single niche. It has no particular comparative disadvantage when it faces no integrated competition: mixing and matching is then inevitable. But it is hard to say that this form of exclusion counts as an antitrust violation of any sort given the net benefits to consumers from having this integrated option available. The United States' strategy in these cases was to start with a conduct remedy, by insisting that United Shoe Machinery Company not use any sale or lease practice that prohibited outsiders from entering at one stage of the production process. (25) But owing to the convenience of the integrated process, the preservation of these options did little to overcome the natural efficiency advantage of United Shoe Machinery Company when it, and it alone, could offer end-to-end service to consumers who were willing to pay a premium for reliable service. United Shoe Machinery Company continued to dominate the market, which led the Supreme Court to call for its dissolution, the ultimate structural remedy.
Both remedies make no sense in the United Shoe Machinery Company cases, and for the same reason: there should have been no antitrust violation at all, so that the choice between bad conduct and a bad structural remedy disappears. But if one remedy was worse than the other, it was clearly the breakup decree. In fact, one of the risks associated with the insistence of keeping certain contractual practices is that they loom far larger in theory than they are valuable in practice, which is one reason why I advocate a litigation strategy of unilateral surrender whenever contract terms are challenged. (26) But that surrender was not feasible in an age that resolved all doubts about the scope of the antitrust laws in favor of their application. All too often the Supreme Court would condemn practices that it did not understand, or whose efficiency properties were apparent from the record below. (27) The 1968 Supreme Court could not fathom how United Shoe Machinery Company's ability to hold market share could be evidence of its efficiency. Since the Court thought that United Shoe Machinery Company's continued dominance had to be the result of a restrictive practice, it ordered the firm to be broken up, given that lesser remedies had repeatedly "failed." The Court did not then see that inability of a competitor to break in at one stage is a private loss that does not positively correlate with any systematic measure of the competitive misallocations of concern to the antitrust laws. It is just this ultimate awareness of the frequent misalignment of private and social losses that eventually led the Supreme Court to hold that a patent does not supply conclusive evidence of a legal monopoly in a tie-in case, given the competition from other patent systems that require the same tie-in arrangements. (28)
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