Silviase/jgov_v1.4_full_ann huggingface dataset:
### I I. Economic Concepts for Analyzing Competition in Telecommunications Services

### A. Access, Exchange and Interexchange Markets

In assessing competition in telecommunications services, it is important to recognize that there are three categories of services involved:

Access service involves the connection of an end user to an interexchange carrier (originating access) or the connection of an interexchange carrier to an end user (terminating access). “Switched access” is provided on a per call basis and priced on a per minute of use basis. “Special access” $ ^{5} $ is provided and priced on a per line basis.

Exchange service involves the connection of end users to other local end users (e.g., a central office or a PBX); calling services (e.g., directories, directory assistance and operator assistance); call management functions (e.g., call waiting, call forwarding, 3-way calling); and messaging functions (e.g., voice message storage and retrieval).

Interexchange service involves transport of a call from an end user in one exchange area to an end user in another exchange area. Interexchange services enable users in one exchange to communicate with users in another exchange or network.

These distinctions highlight two salient facts about the relationships among these three categories of service. First, even though access and exchange services are often jointly supplied using the same facilities (i.e., local loops), access and exchange services can be separate markets: end users can and do purchase access services from one supplier (a Competitive Access Provider -- CAP), while purchasing exchange services from another supplier (a Local Exchange Carrier -- LEC). Alternatively, many business customers provide a substantial share of their own exchange services through the lease or purchase of a Private Branch Exchange (PBX), while purchasing access services from the LEC and/or a CAP. Second, access service is a strong complement of interexchange service: to complete an interexchange call requires originating access, interexchange transport and terminating access. Exchange service, on the other hand, is not necessarily a strong complement of interexchange service. If customers have access service alternatives -- even if they do not have exchange service alternatives -- they are not dependent on the exchange service provider to reach interexchange carriers. Hence, in evaluating the potential for vertical leveraging from local services to interLATA service, it is access, not exchange service, that should be at the center of the inquiry.
### B. Geographic Markets for Access and Exchange Services

The geographic markets for both access and exchange services are local -- corresponding roughly to the area served by a local network of access lines. $ ^{6} $ Because each local serving area is a separate geographic market, measures of competition should not aggregate across geographic markets; doing so understates the degree of competition in concentrated markets where entry occurs soonest and develops fastest. $ ^{7} $ The size of geographic markets varies because the density of users varies: the lower the population density, the larger the geographic market for access and exchange services. The volume of access services varies widely across geographic markets because the density of users and the intensity of usage varies widely across markets: total volume of access services in a large city is a very large multiple of that in a small city. There are economies of scale in the production of access services, but by targeting only high volume market areas, entrants can achieve sufficient scale to operate efficiently. There are economies of scope in the supply of access and exchange services, since the same access lines can be -- and typically are -- used to produce both access and exchange services to low volume customers.

### C. Interdependencies among Access, Exchange and Interexchange Services

Local exchange carriers provide access, exchange and interexchange services; BOCs are restricted from offering interexchange services that cross a LATA boundary. Competitive access providers have provided only access and end-to-end private line services. Local switching capacity is necessary for exchange service, but not for access service (i.e., access lines can be connected directly to the interexchange service supplier; the interexchange supplier can provide the necessary switching functions). The principal customers of access services are the interexchange carriers (IXCs), who are the largest customers of LECs and CAPs. There are competing forms of interexchange services which do not require access services, including microwave transmission systems and satellite transmission systems. In both these and other cases, end users are connected directly to each other (e.g., a VSAT network that interconnects auto retail dealership directly to an auto parts supply facility). $ ^{8} $
Network access is a strong technical complement to both exchange and interexchange services, since without their own network access, customers would have to use a pay phone or some other form of access to make local or long distance calls. Although network access is complementary, there is also growing substitutability among network access, exchange and interexchange services. For example, as a value-added service provider, an on-line information service (e.g., Prodigy or CompuServe) can provide its customers a connection to its on-line services in either of two ways over wireline telephone networks. $ ^{9} $ It can purchase “local” telephone network access lines from a LEC, enabling customers to dial a local number even though the call is then routed by Prodigy over an interexchange or value-added network to some distant database facility. Alternatively, Prodigy can purchase “800” service from an IXC, which means that the customer makes a free “long distance” call to reach the on-line service. In the first case, the LEC receives revenues from the fixed monthly charges for lines sold to Prodigy, and possibly, but not necessarily, local usage charges. $ ^{10} $ In the case of the 800 service, the LEC receives access usage charges from the IXC, but does not receive the fixed charges of providing local access lines to Prodigy. There are other instances in which network access, exchange and interexchange services compete, and the number of instances is growing as network capabilities increase and customer needs become more complex. Competition exists for each portion of a call -- network access, exchange and interexchange -- not just the end-to-end call itself. Hence, even when the LEC carries a portion of the call and gets a portion of the revenues whichever way the call is routed, competition among access lines, exchange and interexchange services is an important factor in the marketplace, increasing the substitutability among, and therefore the elasticity of demand for, each of these services.

While there is a crucial legal distinction between intraLATA and interLATA interexchange services, from a customer's perspective, this distinction has no purpose -- indeed, most consumers do not know what a "LATA" is. $ ^{[11]} $ This artificial distinction between intraLATA and interLATA services has very real implications for competition in interexchange services. Initially, after the AT&T
divestiture, there was a kind of symmetry between BOCs and IXCs. Whereas BOCs could provide only intraLATA interexchange service, IXCs could, in most states, provide only interLATA service. Since divestiture, that symmetry has disappeared, as most states have removed state regulatory restrictions on intraLATA services, while the MFJ restriction on RBOC entry into interLATA service remains largely intact. This growing asymmetry works very much to the advantage of IXCs, who are taking profitable high volume intraLATA business away from the BOCs.

### D. Concepts in Local Access and Exchange Competition Policy

In state and Federal regulatory proceedings in the U.S., it is often argued that the local exchange carrier has a “bottleneck” (or “monopoly bottleneck”). This term, though, has been used to describe two very different economic characteristics of communications networks, one of which is correct; the other of which is not. In the first instance, it refers to the local access “bottleneck,” which conveys the fact that all calls to a customer served by a local exchange carrier must pass through the facilities of that carrier. $ ^{12} $ This is a correct characterization and use of the term bottleneck, independent of the number of local service providers, as I will show subsequently. The use of term “bottleneck” has also been used to refer to the local loop, i.e., the physical means by which network access is provided. In that usage, it has been used to imply that the local loops of the incumbent exchange carrier are an “essential facility,” because it is not economic for competing carriers to build their own loops or purchase them from alternative suppliers. As we shall see, that use of the term “bottleneck” is incorrect.

Consider first the use of the term “bottleneck” with reference to local access. Suppose there are two carriers, red and blue, serving an area, both of which have extensive networks, with local loops that reach every customers’ premises. Imagine that John, served by the red carrier, and Sally, served by the blue carrier, want to be able to call each other. In that situation, the red carrier has a bottleneck to John, and the blue carrier has a bottleneck to Sally. Note that the bottlenecks exist even though the red network extends to Sally and the blue network extends to John, so long as John and Sally subscribe to only one of the carriers, red or blue. Thus, the bottleneck exists even when two competitors’ networks reach every customers’ premises. Clearly, the “bottleneck” in local exchange services results not from there being a monopoly supplier of local exchange services in the area but from the fact that each customer is served at any given time by only one carrier. Hence, it is not the local loop that is the source of the bottleneck but the access provided over the loop.

Because of the access bottleneck, John and Sally would have to subscribe to the same carrier for local exchange service to be able to call each other. In the n-tuple case of many customers, each customer would have to subscribe to both the blue and red carriers to be assured of having access to
all other customers in the area. The same access bottleneck applies without limit: if there are m carriers in an area, each with networks extending to all n customers in the area, each customer would have to simultaneously subscribe to all m carriers to be able to access all other n-1 customers. In recognition of this “bottleneck” problem, LECs have offered -- or been required -- to interconnect with Alternate Exchange Carriers (AECs) providing service in the same area. Because the bottleneck exists no matter which carrier provides access, though, LECs have sought reciprocal technical interconnection, i.e., all exchange carriers must practice open access and non-discriminatory interconnection. This explains why the need for interconnection among local exchange carriers is not really in dispute in the U.S. (although the specific terms and pricing of interconnection services definitely are). In essence, there is no disagreement that local access is a “bottleneck,” regardless of who provides it.

The term “bottleneck” has also been used in a quite different sense, though, to refer to the incumbent local exchange carrier’s “monopoly” over the supply of local loops. Under this characterization, local loops are said to be an “essential facility” and should therefore be unbundled and priced separately. Whether local loops -- or any other element of local exchange facilities or services -- are an essential facility is a factual question. If it is uneconomic for AECs to construct their own local loops to serve potential customers (or to purchase them from a source other than the LEC), then the local loops of the LEC are, arguably, an essential facility and should be sold (rented) on an unbundled basis to AECs. If it is economic for AECs to self-supply (construct) their own loops to reach customers, or there are other sources of “loops for rent,” then the LEC’s loops are not an essential facility.

Prospective entrants into local exchange services have argued for “unbundling” of the local exchange carrier’s facilities. The only valid economic basis for this position is that the unbundled service in question is an essential facility. As often as not, though, proponents of unbundling in the U.S. have argued that, because there is a bottleneck in local access, LECs should be required to unbundle. $ ^{13} $ This is a non sequitur. Local access is a bottleneck, for the reasons just explained. That does not necessarily mean, though, that the facilities of the local exchange carrier are “essential.” When a facility is essential but is only offered for sale in combination with other facilities, there is a valid economic rationale for requiring the incumbent supplier to unbundle and separately price these facilities. In the U.S., state regulators have asserted that certain elements of local exchange facilities
are essential and should therefore be unbundled: telephone numbers; listings of customers' telephone numbers; emergency services calling capability (911); and access to rights-of-way. In other cases, regulators have ordered LECs to unbundle facilities merely because an AEC or IXC requested the unbundled service, with no empirical evidence that the services requested are, in fact, essential facilities. Again, there is no valid economic basis for mandatory unbundling just because a competitor requests the unbundled service.

### E. Relative Size and Growth of Access, Exchange and Interexchange Services

Table 1 shows operating revenues of the eight largest LECs by type of service. Access revenues account for nearly 25% of LEC revenues and other services (e.g., directory advertising, equipment sales, cellular revenues) account for an additional 22% of revenues. Long distance services, such as intra-LATA toll calling, comprise 12% of revenues. Thus, nearly 59% of LEC revenues come from sources other than local service.

Table 1: 1992 Operating Revenues of Large LECs by Type of Service

(in millions of dollars)

Company	Exchange Service	Long Distance	Access Service	Other Services	Total
Ameritech	5,012	1,252	2,654	2,235	11,153
Bell Atlantic	4,892	1,556	2,953	3,246	12,647
BellSouth	6,236	1,249	3,817	3,899	15,201
GTE	5,000	3,396	4,477	2,989	15,862
NYNEX	6,308	1,113	3,356	2,378	13,155
Pacific Telesis	3,377	2,103	2,250	2,205	9,935
Southwestern Bell	4,668	1,012	2,548	1,788	10,016
U S WEST	3,674	1,420	2,720	2,467	10,281
TOTALS	39,167	13,101	24,775	21,207	98,250

Revenue growth rates vary dramatically across access, exchange and interexchange services. As shown in Figure 1, interstate and intrastate toll dial equipment minutes of use have grown at moderate to high rates, with toll minutes growing at a much faster rate than local traffic. This explains why interexchange carriers are growing so much faster than local exchange carriers. For example, MCI's post-divestiture annual revenue growth rate has been 23% whereas Pacific Bell's growth rate in local access and exchange services has been 1%. $ ^{14} $ These differential growth rates across network access, exchange and interexchange services mean that a LEC's sales are likely to
decline if it loses market share, whereas AT&T's interexchange minutes have continued to grow even as it has lost market share to other IXCs. $ ^{15} $

Figure 1: Growth in Minutes of Usage

Source: FCC Trends in Telephone Service

### I II. Competition and Public Policies in Interexchange Services

### A. Market Structure of Interexchange Services

Using the traditional “structure-conduct-performance” framework for assessing competition, the market for interLATA calling, while less concentrated than in 1984, remains highly concentrated today, having a traditional oligopolistic structure. For example, the FCC measures AT&T's share of interstate switched access minutes in the second quarter of 1994 at 59%, AT&T's share of long-distance revenues in 1993 at 59%, and AT&T's share of pre-subscribed lines as of December 1993 at 71% $ ^{16} $ . Using the FCC's numbers for total toll revenues in 1993, a 61 billion market, the Herfindahl Index is approximately 3850. $ ^{17} $ Intrastate InterLATA calling is similarly concentrated. In California, for example, the three major facilities-based interLATA carriers, AT&T, MCI, and Sprint, accounted for over 95% of all intrastate, interLATA calling in 1991, based on minutes of use. $ ^{18} $ Using the market shares of 65% for AT&T, 18% for MCI, and 13% for Sprint
reported by the CPUC, the Herfindahl Index for all intrastate calling was approximately 4700 in 1991. $ ^{19} $

Among residential users, we again find that the interLATA market is highly concentrated. In 1993 on a national basis, using minutes of use of long-distance services by residential customers as the basis, the Yankee Group estimates AT&T's market share at 59%, MCI's share at 19%, and Sprint's share at 11%, with 11% using other carriers. $ ^{20} $ Using these market shares gives a Herfindahl Index of nearly 4000. Using long-distance revenues from residential customers as the basis, this same source estimates AT&T's market share at 70%, MCI's share at 18%, and Sprint's share at 9%, with 3% of long-distance revenues going to other IXCs. These market shares imply a Herfindahl Index of approximately 5300.

### B. Competitive Conduct of IXCs and Pricing of InterLATA Services

In a study conducted for AT&T, Michael Porter found “competitive outcomes in the interLATA interexchange industry... lower prices, better service quality, new service introduction.” $ ^{[21]} $ As evidence of price reductions, Porter noted that from 1984 to 1993 retail prices to customers prices have fallen by 56% on average. AT&T's average revenue per minute across all services dropped 11.9% from 1991-1993, and 7.2% net of access charges. As evidence of competitive behavior in the interLATA industry, Porter cites proliferation of features, an increase in promotions, heavy advertising and expansion of selling capacity. Porter also argues that increasing customer churn and market share fluctuations demonstrate that customers feel free to change and are not impeded either by ignorance or switching costs, firms are competitive, value is being created.

In a study commissioned by MCI, Robert Hall calculated the changes in the ratio of revenues/minutes of long distance service - which Hall was able to calculate because he used gross revenue, and obtained minutes of service from FCC documents and MCI internal documents. $ ^{22} $ Hall cites several of his calculations as evidence that the long distance market is competitive:

concentrated oligopoly. The FCC data show LDDS with a 1.9% share of total toll revenues in the U.S. in 1993; after its acquisition of WilTel, LDDS has about 4-5 percent of long-distance revenues.

$ ^{19} $ Again, although far from perfect, these numbers should leave little doubt that the interLATA, intrastate market in California is highly concentrated. Our conclusions below would remain entirely valid even if the Herfindahl Index were “only” 3500, for example.

$ ^{20} $ The Yankee Group, “The 1993 U.S. Long-Distance Review: Will AT&T Weather the Storm,” Yankeewatch, Vol. 9, No. 7, May 1994, p.8.

$ ^{21} $ “Competition in the Long Distance Telecommunications Market,” Michael E. Porter, Monitor Company, September, 1993.

$ ^{22} $ Hall, Robert E., “Long Distance: Public Benefits From Increased Competition,” October 1993, Applied Economic Partners.
- from 1985 - 1988, the average price of long distance fell by 30% relative to the general price level; from 1988-1992, it fell 17%; neither decline, though is net of access charges;

- since 1989, AT&T's real price for regular long-distance calls has fallen by 3% per year, net of access charges.

- since 1985, long distance prices have fallen by 63% relative to the general price level, based on revenue per minute.

- real gross revenue per minute, net of industry average access charges per minute declined 66% from 1985-1992.

Taylor and Taylor analyzed the effects of divestiture on interLATA competition in three areas: price competition, increases in usage, and other evidence of competition. $ ^{23} $ They found that (1) price declines in the interexchange market were greater before (1972-1983) divestiture than after (1984-1991) $ ^{24} $ ; (2) falling access charges and demand growth caused by population growth alone account for the increases in usage, hence deregulation is not responsible for expanding demand; and (3) attempts at calculating individual firm demand curves failed, possibly due to lack of variation in pricing between firms. Due to accounting changes, and cost shifting from long-distance prices to access charges, by July 1992, AT&T was receiving annual reductions in access charges of approximately 10.8 Billion (compared to 1983 charges), while it's lower prices reduced revenues by only 8.2 Billion per year. Hence, they conclude,

“The overall reduction in interstate long-distance prices and expansion of interstate demand is more than explained by the reduction in the carrier access charges paid by the long-distance carriers to the local telephone companies. Net of these payments, real interstate long-distance prices fell at about half the rate after 1984 than before... that would be expected to arise from vigorous toll competition have yet to materialize.”

In a critique of Taylor and Taylor, Hall argues that their methodology understates actual price reductions because it fails to reflect price improvements achieved by customers through switching their purchases to lower-priced products completely escape his method. According to Hall, this effect is substantial: AT&Ts price fell by 8.3% from 1987-1992, but it's revenue per minute fell by 29.2% over the same period. "It appears that the large difference is the result of promotions, discount plans, and shifts of demand among products, all of which escape measurement under the indirect method." $ ^{25} $