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.. sively high prices resulting from the carriers exercise of market power (4, 58). In 1996, Congress passes the Telecom Act which seeks to open local exchange to competition through facilities-based entry (9, 9). There are differences in local and long-distance carriers that show the structure of the industry. There are advantages and disadvantages for each type of carrier.

The advantage of the IXCs over LECs is that their brand-name recognition is nation-wide, while the LECs only command regional brand-name recognition. But, it appears harder for IXCs to enter local markets than it is LECs to enter long distance markets (9, 36). Local exchange rates are under state control except for access provided for interstate services. Scope economies dictate that local and long distance share the same local loops and switching (9, 41). This lowers the overhead costs of both the LECs and the IXCs.

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Local exchange service comes highly bundled and highly inelastic while the long-distance exchange is more elastic and less bundled. Since local calling areas seem to be growing, the size of local exchange markets would be growing too(9, 25). 85% of outgoing calls are local. In 1995, households spent $19.49 per month on basic service (9, 18). Local switching charges re levied because a long distance telephone call must be switched through the local network, thus tying up switching capacity that has alternative uses. The carrier common line charge is levied specifically to defray the costs of the local telephone distribution plant, and not the costs of completing long distance calls (10, 5).

Long distance companies also purchase a different form of carrier access, special access, from local telephone companies. Special access lines are leased by the month at rates corresponding to their capacity and distance. Actual usage is not metered. Special access, which is supplied by local telephone companies, competes with third party firms. These third party firms, called Competitive Access Providers or CAPs, build small networks in downtown business area that connect users to long distance companies without the use of local telephone networks.

This is an example of a volume discount rate (10, 7). American Telephone and Telegraph has had quite the history of ups and downs. At one time, they were relatively the only long-distance telephone company in existence. In the past twenty years or so, AT&Ts dominance has been reversed by legal decisions, legislative developments, and competitive forces (9, 2). “Modification of Final Judgment” called for the divestiture of the Bell Operating Companies on January 1, 1984 (9, 8). Although AT&T was able to take advantage of the brand loyalty to the Bell system, from which it continued to benefit after the breakup (9, 28).

AT&T was broken up into smaller local firms. At first, the non-AT&T long distance companies, known as the Other Common Carriers (OCCs), had inferior connections to the local telephone companies. This sort of access is called “non-premium access”. The FCC has since made new regulations(10, 6). As part of the settlement, the divested local telephone companies were obligated to install switching equipment that allowed for “equal access” by any long distance company.

This allowed AT&Ts competitors to introduce services that were comparable to AT&Ts. AT&Ts market share dropped from 95% to 80% between the years, 1982-1987. By 1991, MCIs and Sprints revenue market shares had climbed to 17% and 10%. Suprisingly though, since the divestiture; industry output measured by the number of calling minutes, had nearly tripled (10, 4). While the FCC regulates AT&T prices directly, the OCCs and the third party-access providers are not regulated directly. The FCC decided to move to price-cap regulation for AT&T in May 1989 (10, 8). The specific form of price-cap regulation adopted for AT&T divided services into three “baskets”. “Basket 1” includes residential and small business services, international services and operator assisted and calling card services.

“Basket 2” is limited to 800 number services. And, “Basket 3” contains all remaining services, principally those offered to large businesses. Each basket has its own price-cap. As services have been shown to be competitive, they have been removed from price-cap regulation. In October 1991, the FCC permitted AT&T to negotiate contracts with large business customers as an alternative to using the tariffed prices (10, 9).

A simple rate rebalancing could be held up for several months. These delays hampered AT&Ts ability to respond rapidly to increasingly aggressive competition from the other interexchange carriers. Commercial customers were demanding a host of new digital and other advanced telecommunication and data services. AT&Ts incentives to efficiently invest a new technology were silenced by rate-of-return regulation. Since divestiture in 1984, the FCC has continued to regulate AT&T as a dominant interstate carrier in the market for long distance telephone services. In the spring of 1989, price-cap regulation of AT&T replaced traditional rate-of-return regulation.

The change was designed to proved AT&T with improved incentives and greater pricing flexibility in increasingly competitive long distance markets while protecting against cross-subsidization, monopoly and predatory pricing (5, 167). The telecommunications industry has come a long way through out the past two centuries. It all began with the invention of the telephone by Alexander Graham Bell. This took place in 1874 and is said to be the beginning of an era. There have been thousands of advances since then.

We can see this through the period discussed in this essay. It is a small but significant time in the development of the telecommunications industry. We have seen changes in technology, sizes and competitiveness of companies, and regulations. We have also looked at the important differences between LEC and IXC carriers. Lastly we learned about one of the most prestigious telephone companies ever, AT&T.

I feel that I have learned a lot while researching for and writing this paper. I think that I have a good understanding of price discrimination, natural monopolies and competitive industry. It is truly amazing to think about the importance of the telecommunications industry to the world today. Bibliography 1. Crandall, Robert W. and Kenneth Flamm.

Changing the Rules. The Brookings Institution: Washington D.C., 1989 423 pgs. 2. Economic Commision for Europe, Geneva. The Telecommunication Industry: Growth and Structural Change. United Nations: New York, 1987 292 pgs.

3. Horwitz, Robert Britt. The Irony of Regulatory Reform. Oxford University Press: Oxford, New York, 1989 412 pgs. 4. Johnson, Leland L.

Common Carrier Video Delivery by Telephone Companies. Rand Publishers: 1992 77 pgs. 5. Mitchell, Bridger M. and Ingo Vogesang. Telecommunications Pricing: Theory and Practice.

Cambridge University Press: Cambridge, New York. Rand Publishers, 1991 305 pgs. 6. Olves III, Dick W. The Making of Telecommunications Policy.

Lynne Rienner Publishers: Boulder, London, 1999. 7. Table 11-2. Total Operating Revenues of Long Distance Service Providers. 1985-1999. 8.

Telecommunications Type Approval: Policies and Procedures for Market Access. Organization for Economic Co-Operation and Development (OECD) : 1992 161 pgs. 9. Volelsang, Ingo and Glenn Woroch. Local Telephone Service: A Complex Dance of Technology, Regulation, and Competition.

Edited by Larry Duetsh, 1998. 51 pgs. 10. *** Essay on the Breakup of American, Telephone and Telegraph.

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