Is the Theory Behind U.S. v AT&T Applicable Today?

Lost in the rush to reform is the idea that there were some reasons to force AT&T to divest its local telephone operations. These reasons may have been primarily theoretical, backed by interpretations of AT&T’s pre-divestiture conduct rather than econometric evidence that keeping local telephone exchange companies from operating in other related markets would improve economic performance. A serious yet still incorrect rationale for the divestiture in US v. AT&T is that vertical integration by monopolies is inherently bad, because of the propensity to “leverage” market power from the monopolized market into erstwhile competitive markets. The US v. AT&T history is instructive. Cross-subsidization was never detected as such. Instead, AT&T was accused of “pricing without regard to cost,” i.e., acting as if it could cover any losses from undercutting competitors by shifting costs to its regulated monopolies.