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Abstract

As part of the Modification of Final Judgment (MFJ) that implemented the divestiture of the Bell operating companies (BOCs) from AT&T on January 1, 1984, the BOCs were forbidden to carry telephone calls from one local access and transport area LATA) to another. Although the Telecommunications Act of 1996 superseded the MFJ, it retained the BOCs' interLATA prohibition and established, in section 271, a process - involving each state public utilities commission, the Federal Communications Commission (FCC), and the Department of Justice (DOJ), acting on a state-by-state basis - by which the BOCs could earn regulatory approval to enter the interLATA market within the regions in which they provide local exchange service. As of September 1, 2002, the BOCs had received section 271 authorizations to provide in-region interLATA service in fifteen states.

In this Article, we review the origin of section 271. We explain that the FCC and DOJ did not expect that BOC entry would lower prices for interLATA service. Next, we report an empirical analysis designed to estimate the effect that BOC entry has had in New York and Texas, two states where section 271 authorizations has been given. We have three major findings. First, we find that the average consumer received a savings of 8 to 11 percent on the monthly interLATA bill in the states where BOC entry occurred as compared to "control" states where BOC entry had not occurred. Second, we find that competitive local exchange carriers (CLECs) gained a substantial increase in cumulative share of the local exchange market in states where BOC entry occurred as compared to the control states. Third, we find that the average consumer experienced no significant change in her local bill in states where BOC entry into interLATA service occurred as compared to the control states. These empirical results suggest that BOC entry in New York and Texas has led to consumer benefits in terms of lower interLATA bills and greater effective choice for local exchange services in those states.

We explain how these empirical results are consistent with the economic theory of "double marginalization." Because this economic analysis is not part of the approach that the FCC and the DOJ take with respect to implementing section 271, it is not surprising that these two agencies did not expect price to fall after BOC entry into the interLATA market.

Reprinted from Antitrust Law Journal, vol. 70, no. 2, pp. 463-484 (2002), a publication of the American Bar Association Section of Antitrust Law.

For years, the competitive consequences of BOC entry into long- distance telecommunications have been debated. Now that regulators have issued the first authorizations under Section 271 and BOC entry has occurred, it is possible for the first time to evaluate directly the empirical effects of BOC entry into the in-region interLATA market.

In Part II of this Article, we review the origin of Section 271. Based on the record, we conclude that the FCC and DOJ did not expect, in their early implementation of Section 271, that BOC entry would lower prices for interLATA service.

In Part III, we present an empirical analysis designed to estimate the effect that BOC entry has had in New York and Texas, the first two states where Section 271 authorizations have been given. We discuss three major findings. First, we find that the average consumer received a savings of 8 to 11 percent on the monthly interLATA bill in the states where BOC entry occurred as compared to" control " states where BOC entry had not occurred. Second, we find that competitive local exchange carriers (CLECs) gained a substantial increase in cumulative share of the local exchange market in states where BOC entry occurred as com- pared to control states without BOC entry. Third, we find that there was no significant change in the local bill of the average consumer in states where BOC entry into interLATA service occurred as compared to those bills in the control states. These empirical results suggest that BOC entry in New York and Texas has led to consumer bene fits in terms of lower interLATA bills and greater effective choice for local exchange services in those states.

In Part IV, we explain how these empirical results are consistent with the economic theory of " double marginalization. " This economic analysis is not part of the approach that the FCC and the DOJ take in evaluating requests for Section 271 authorization, which may help explain why these two agencies did not expect price to fall after BOC entry into the interLATA market. Our empirical findings therefore should be of use to regulators evaluating whether BOC entry into interLATA services should be allowed in other states.

II. THE ORIGIN AND IMPLEMENTATION OF SECTION 271

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J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.

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