Review of Industrial Organization
13: 295–319, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
Testing for Competitiveness of Markets for Long
Distance Telephone Services: Competition Finally?
PAUL W. MacAVOY
Management Studies, Yale School of Management, New Haven, CT, U.S.A.
Abstract. Telecommunications regulatory policy is driven by rhetoric and myth concerning the
“competitiveness” of long-distance service. Relying on behavioral tests for competitiveness, this
review brings up to date analytical work establishing the pattern of competition or the lack of
competition since the 1984 AT&T divestiture. Through mid 1997, the three large long-distance
carriers in setting their price-cost margins have managed to carry through on a previously established
strategy of tacit collusion in both message toll services and WATS-type business services. The
remarkable results have been that price-cost margins increased while sales concentration declined.
This general pattern is not contradicted by the most recent offering of 15-cent per minute “one
price” on new discount plans since that too implies an increase in carriers’ price cost margins as
concentration continued to decline.
Key words: Competitiveness, price-cost margins, tacit collusion, discount plans
I. Introduction to the Issues
Of the current controversies in regulatory policies the most intense is on “compet-
itiveness” in telecommunications. The threshold test in the Telecommunications
Act of 1996 for entry of the Bell Operating Companies into long-distance service
markets is that their local exchange markets have to be competitive. Even passing
that test, they should be kept out of long-distance unless they demonstrate that the
public interest would be served by their entry adding to the competitiveness of
those markets. Given these critical matters, not only regulatory agencies but also
journalists, consumer advocates, company spokesmen, and talk show hosts have
shared their expertise on the state of competition and how that affects the public
interest in local and long-distance markets.
Their conclusionsrange from markets are monopolistic to perfectly competitive.
The central tenet of their work, however, is that the competitiveness of behavior is
changing in response to the Act and to rapid entry of a large number of new market
service providers. We focus here on that argument that there is new competition out
Williams Brothers Professor of Management Studies, Yale School of Management. This research
was funded by the John M. Olin Foundation Research Program at Yale for the Study of Markets and
Regulatory Behavior. I am grateful for research advice and assistance on data analysis from Michael
J. Doane of PM Industrial Economics, Inc., Michael A. Williams of AG Economics, Inc., and David
J. Sibley of the Economics Department of the University of Texas.