Initial Competition

1
Initial Competition

• Economics 235 Economics of Telecommunications

2
Equipment Competition

• Hush-a-Phone - 1956
• Carterfone - 1968
• FCC - early 70's
• Moved towards competition for all terminal
  equipment.

3
ATT Opposition

• ATT opposed this for two reasons
• Network harm
• Economic harm

4
Computer Inquiry II - 1980

• ATT wanted to offer Dataspeed 40/4
• a smart terminal, as a component of its dataphone
  digital service.
• Competed with IBM's smart terminal.
• CI II tried to distinguish between telephone-type
  and data-processing type equipment
• Deregulated all CPE equipment.

5
Initial Long Distance Competition

• Above 890 Decision (1959)

6
Microwave Communications Inc (MCI) (1967-71)

• Filed application to provide public microwave
  between St. Louis and Chicago.
• ATT argued it was creamskimming.
• Found in favor of MCI.

7
CREAMSKIMMING AND RATE AVERAGING.

• Suppose calls from Chicago-St. Louis cost
  .10/minute and the usage (at current prices) is
  10 million minutes
• Calls from Normal-Greenbay (same distance?) cost
  .25/minute and there are 5 million.
• Total cost equals (1.0 million 1.25 million
  2.25 million)

8
Rate Averaging

• Suppose the difference is caused by economies of
  scale.
• Regulatory policy has set rate-averaging as the
  regulatory policy.
• Therefore, for the same distance call, the price
  must be the same.

9
What happens if the average cost is charged w/o
regard to usage?

• Set price equal to .20/minute. Rev1 2 million
  1 million3 million. But we want TRTC as a
  regulatory constraint.
• Get weighted average cost by dividing TC by total
  Q (2.25 million/15 million 0.15/ minute) TR
  1.5 M 0.75M2.25M.

10
Competitive Entry

• If pricing is averaged and the competitor has
  similar cost structure to incumbent, where will a
  competitor enter?
• Suppose their costs are .13/minute and they
  charge .14 to customers (earning economic
  profit) and they get 20 of the market (2 M
  minutes).
• What happens to the incumbent?

11
Incumbent Spiral

• With only 8 M min., the firm's costs decline to
  2.05 M
• But TR is only 1.95 M.
• How much does it now charge to break even?
• To break even average price rises to.158/min.
  More people will switch to competitor and avg
  price rises again.

12
Competitors profits

• Competitor makes 20,000 in economic profit.
• Society is worse off because competitor uses
  .13/minute in society resources but incumbent
  uses only .10/min.

13
What does the regulator do?

• Forbid competition.
• De-average rates
• looks like predatory pricing.
• Only price cuts where there is competition and
  some users are worse off.

14
Execunet and Switched Services competition

• Execunet Shared FX service
• It is essentially switched long distance service
  with more dialing and lower quality of service

15
Execunet and Switched Services Competition

• Natural extension of ATT's FX service.
• Switched service carried more than its fully
  allocated costs and FX service had less.
• ATT challenged it as unlawful entry into
  switched voice market but lost

16
ENFIA Interconnection Charges

• ATT calculated the implied cost per minute for
  use of the local network by taking the total
  revenue distributed by settlements divided by the
  total number of long distance access minutes.
  This became known as the ENFIA tariffs -
  "Exchange Network Facilities for Interstate
  Access".
• Thus competitors would pay the full amount of
  ATT's estimated contribution to the local
  exchange.

17
ENFIA Interconnection Charges contd

• FX and regular business lines versus ENFIA
• Compromise reached. 35 of rate - rev lt 110 M.
  45 110 M ltrevlt250 M. 55 of rate
  250Mltrevlt375 M. Based on the number of lines
  rather than minutes.
• Interim compromise was supposed to last short
  while. Lasted from 1978 until 1984