Recent Structural Cases

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Recent Structural Cases

The most important antitrust cases of recent years involved three giant firms in two vitally important industries communications and computers. A view of the three cases reveals the flavor of modem thinking about antitrust policy. The AT&T case and the Bell Doctrine. Until the early 19805. AT&T was a vertically and horizontally inte- grated monopolist in’ the telecommunications market, It handled more than’ 95 percent of all long- distance’ calls, provided 85 percent of all local lines, and sold most of the nation’s telephone equipment. The complex of companies owned by AT & T often called the Bell System-included Bell Telephone Labs, Western Electric Company, and 23 Bell operating companies. In 1974, the Department of justice filed a far reaching suit. It contended that AT&T had (1) Rio the regulated long-distance market by  means, such as preventing MCI and other carriers from connecting to the local markets and (2) monopolized the telecommunications- equipment market by refusing to purchase equipment from non-Bell suppliers. . The fundamental theory underlying the case was called the “Bell Doctrine” by William Baxter scholar and former head of the federal Antitrust Di- vision.

This holds that regulated monopolists have the incentive and the opportunity to monopolize related markets (such as ones they buy from or sell to) and that the most effective solution is to “quarantine” the monopoly segment by separating its ownership and control from the ownership and, control of potentially competitive segments of the industry. III short, regulated monopoly and competition should not be mixed. Tilt” economic theory behind the Bell Doctrine ‘is that a monopolist. particularly a regulated monopolist, can increase its profits by integrating horizontally or vertically. For example. higher profits can be attained by disadvantaging potential competitors in the related industry or by charging excessive costs for its own unregulated products (such as telephone equipment) to the regulated entity which are then passed “on through the cost-plus formula (for telepure phone service). This behavior is particularly likely when regulators have imperfect information about the firm’s costs and behavior.

Faced with the prospect of losing the antitrust suit. the company settled in a “consent decree” that almost fully conformed to the Bell Doctrine. The 10 Bell operating companies were divested (or legally separated) from AT&T and were regrouped into seven large regional telephone holding AT & T retained its long-distance operations as well as Bell Labs (the research organization) and Western Electric (the equipment). The net effect was an 80 percent reduction in the size and sales of the Bell System. The regulated mol were no longer allowed to operate in competitive markets. ” The dismantling of the Bell System set off a breathtaking revolution in the telecommunications industry. New technologies are changing the land as cellular phone” systems are eating away at the natural monopoly of Alexander Graham Bell’s wire-based system; telephone companies are joining forces to bring television signals into homes; fiber optic lines are beginning to function as data superhighways.

carrying massive amounts of data around the country and the world. The Internet is linking people and places together in ways that were a decade ago. The one clear lesson of the breakup of the Bell.System is that monopoly is not necessary for rapid technological change. The IBM case. A second set of antitrust cases in recent years involved computer companies. The first case was an attempt by the government to dismember .IBM.Filed in 1969. the suit charged that IBM “has attempted to monopolize and has monopolized general purpose digital computers.” The government charged that IBM had a dominant market share, with 76 percent of-the market in 1967. Moreover, the government claimed that 18 M” had used many devices to prevent others from competing; the alleged steps included tie-in pricing. excessively low prices to discourage entry. and introduction of new products that horitended to reduce the attractiveness of the products of other companies.

IBM contested the government case with tenacity and vigor. IBM’s major defense was that the was- penalizing  than behavior. The fundamental dilemma in such cases had” been state in the Alcoa case: “The successful competitor having been urged to compete must not be turned on when he wins that the government was the firm that foreseen the enormous potential in die computer and had dominated the industry through its superior skill. foresight, and industry.”

The case dragged along inconclusively until the Reagan administration’s antitrust chief, William, decided in 1982 to dismiss the case as “without merit.” The government’s reasoning was that, unlike the industry. the Computer industry was unregulated and subject to the full force of market competition. Baxter held that this industry was intrinsically competitive and that government attempts to restructure the computer market were more likely to harm than promote economic efficiency.

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Recent Structural Cases