Silviase/jgov_v1.4_full_ann huggingface dataset:
Professor Paul MacAvoy concludes that interLATA competition is limited, as evidenced by increasing price-cost margins and simultaneous pricing movements among the big three IXCs. $ ^{26} $ Securities analysts have likewise found that price competition in long-distance services is limited:

“Despite its efforts to increase market share, AT&T is not willing to slash prices which is why we believe that profitability will improve. The company has led price increases this year, which have been followed by the other long distance companies, and we expect this trend to continue.” $ ^{27} $

“The long distance industry... is entering the end game stage of its development several years sooner than most industry observers anticipated, but nonetheless consistent with what expectations for the end game has been, namely stable market share and pricing dynamics.” $ ^{28} $

Given these various results, there is conflicting evidence as to whether the prices of interLATA services have, or have not come down in the aggregate. As to the pattern of pricing, though, the evidence is quite clear: the industry has displayed a pattern of price leadership by AT&T. Given its concentrated market structure and AT&T's very large market share, this should not be surprising. The typical pattern is for AT&T to raise its tariffed, retail rates, with MCI and Sprint following very soon thereafter with their own rate hikes. $ ^{29} $ Hence, interLATA competition has taken two primary forms: (1) extensive advertising campaigns by AT&T, MCI, and Sprint, as predicted by economic theory in the presence of high price-cost margins; and (2) selective discounting to larger and more sophisticated users. The rest of this section is devoted to a discussion of IXC discounting behavior and its implications for interLATA competition.

AT&T, MCI, and Sprint have heavily marketed their special calling plans in recent years. Currently, their leading calling plans are True USA, Friends and Family II, and The Most 2, respectively. The pattern of raising basic retail rates and promoting these discount plans is known in the industry as “price up, promote back.” $ ^{30} $
The discount plans offered by the major carriers are targeted at users with relatively heavy calling volumes. AT&T's True USA Savings is designed to win the allegiance of all customers spending more than 10 per month on long-distance service. Once the monthly bill reaches the 10 threshold, a customer is eligible for volume discounts that grow along with calling volume. There is no enrollment fee, but the customer must sign up with AT&T in order to become eligible. $ ^{31} $ MCI's Friends & Family II offers customers a 40% discount on those calls made to others within the user's calling circle (a maximum of 20 domestic numbers) who are also MCI customers, 20% on all other calls in the circle, and no discount for calls outside of the circle. There is a monthly charge of three dollars, and the customer must enroll in the plan. $ ^{32} $ Sprint has recently announced the Most 2, a plan that offers volume discounts once the subscriber's monthly long-distance bill reaches 30. The level of discount rises with call volume. $ ^{33} $

Since many customers, especially residential customers, either are not eligible for these discount plans, or simply do not participate in them, and thus are paying full retail rates for their interLATA calls. $ ^{[34]} $ There are several bases for concluding that most interLATA customers do not enjoy the discounts associated with calling plans. First, AT&T states in its request to the FCC to end dominant carrier status that over 60% of its customers have phone bills of 10.00 or less. $ ^{[35]} $ Placed in the context of our discussion here, over 60% of AT&T customers fail to qualify for a discount under the company’s True USA Savings. Given that available discounts under Sprint’s The Most 2 do not kick in until monthly long-distance revenues reach 30, it is likely that an even smaller percentage of Sprint’s subscribers are able to take advantage of Sprint’s leading discount plan.

A reasonable estimate is that less than one-third of U.S. households are on an IXC discount plan. AT&T has 12 million residential customers signed up for True USA, and 11 million signed up with True Rewards. $ ^{[36]} $ Based on what these plans offer, and AT&T's marketing strategy, it seems reasonable to assume that the vast majority of customers signed up for True Rewards are also on True USA, implying that about 12 million AT&T residential customers are enrolled in a discount plan. $ ^{[37]} $
MCI has 11 million customers signed up with Friends & Family and Friends & Family II. $ ^{38} $ Sprint has signed up about three million customers on its The Most and The Most 2 plans. $ ^{39} $ Adding up these plans gives a total of 26 million residential customers. Even if we have under counted the number of residential customers on IXC discount plans by several million, they still comprise less than one-third of the 91.6 million residential access lines that were in place as of March 1993. $ ^{40} $

### C. IntraLATA Services

Historically, IXCs have provided a complementary service to LECs by providing connections between exchange areas. Following divestiture and the enactment of the Modified Final Judgment, LECs were generally limited to providing intraLATA interexchange services, including intraLATA interstate services. IXCs provided interLATA services. States have determined whether or not IXCs could provide intraLATA interexchange services. Initially, states were reluctant to allow IXCs to provide intraLATA services; in 1984 only 5 states allowed intraLATA toll competition. But now most states allow intraLATA competition and several other states are currently considering allowing competition in intraLATA toll services, although no state, as yet, has implemented usage presubscription on intraLATA calls, so users have to dial (or program their phones to dial) an IXC carrier code (10-NXX) to route their call around the LEC to an IXC.

In spite of this limitation, IXCs are competing directly for intraLATA customers. $ ^{41} $ For instance, Ameritech reports that Quality Strategies, a market research firm, found that for large and medium business customers in five of seven Ameritech urban markets, Ameritech retains less than half of intraLATA toll revenues. IXCs have an advantage over LECs because they can offer “one-stop” shopping to customers for both interLATA and intraLATA interexchange services. In some areas, LATAs cross state boundaries (such as the LATA covering the Washington, D.C. metropolitan area) and interexchange calls for these services are regulated by the FCC. As noted above, the FCC has allowed competition for intraLATA interstate services and IXCs also provide competition to LECs for these services. For instance, Bell Atlantic competes with at least 44 IXCs for the provision of intraLATA interstate services.
### I V. Competition and Public Policies in Access Services

### A. Composition of Demand for Access and Exchange Services

The composition of demand refers to the way in which the demand for telecommunications services is distributed across customers and classes of services. In telecommunications services, the distribution of revenues is highly concentrated: a small percentage of customers, lines and geographic areas account for a very large share of the revenues in most service categories because the intensity of access and usage varies dramatically across customers and space. In addition, the density of customers varies dramatically across space: that is, the most intensive customers tend to be highly concentrated geographically. Understanding the composition and concentration of demand in local telecommunications is critical to analyzing the way in which competition has developed to date, and is likely to develop in the future.

A substantial portion of LEC revenue is derived from business customers. LECs derived approximately 41% of their local revenues from commercial customers in 1993. Business customer growth is expected to be 80% greater than residential customer growth over the next five years. $ ^{42} $ Thus, business customers are an important part of the telephony market, and will become even more so in the future. Recognizing that basic residential service is not as profitable to LECs as other services, it is likely that business customers represent the principal source of profits to LECs.

LEC revenues, particularly business revenues, is also geographically concentrated. A study of the nation's largest states found that 10% of business revenues are generated in .05% of the land area; 30% percent come from about 1.1% of land area; and 75% of business revenues are generated by 8% of the land mass in these states. $ ^{43} $ At Ameritech, the top 15% of its business accounts generate 72% of business revenues; the top 2% of business accounts generate about 45% of all business revenues. Residential demand is also concentrated, if somewhat less so: the top third of residential customers account for 54% of total residential revenues, and 64% of non-local loop revenue. US West derives 30% of its business calling revenues in the state of Washington from 0.1% of the land area. Ninety percent of Nynex's New York business local revenues, including interexchange access, originate from only 10% of the New York geographic land area. As is shown in Figure 2, Pacific Bell's revenues are also highly concentrated, with 36% of total revenues generated in just 51 wire centers (10% of the total; and 73% of revenues coming from 30% of its wire centers.
Figure 2: Geographic Distribution of Pacific Bell Revenues, By Wire Center

Source: Pacific Bell

The customer base for access revenues is even more highly concentrated. At Bell Atlantic, for example, 71% of its special access revenue is derived from 15% of its wire centers; 75% of its total access revenue is derived from 25% of its wire centers. Only 0.3% of New York's land area generates 30% of Nynex's business and interexchange access revenues; LATA132 (which includes New York City) accounts for over 50% of Nynex's total interstate access revenues. The "customers" for access services provided by LECs are primarily interexchange carriers, most notably, AT&T, MCI, and Sprint. IXCs generally pay for the access charge and then incorporate those charges into the rates the IXC charges consumers for long distance. As a result, revenues from AT&T, MCI and Sprint for access charges constitute greater than 80 percent of total LEC access charge revenues. $ ^{44} $

### B. Competition in Access Services

To encourage competition in the provision of local access services, the FCC authorized competitive access providers (CAPs) to provide access from end users of interstate services to
interexchange carriers. Most states then adopted policies that “mirror” interstate access rates to IXCs, although in some cases intrastate rates are higher, or lower, than interstate access rates. Many CAPs have entered the access market and are growing rapidly.

Because revenues are highly concentrated in access and exchange services, an entrant does not need to serve all geographic or customer segments to compete effectively in one or a few segments. Instead, entrants have targeted their initial entry at the small share of the customers who account for a large share of revenues. Moreover, due to widespread price averaging, customers with very different costs of service pay the same prices. Hence, profitability is even more highly concentrated than revenues, since the highest volume customers and those in the most densely populated areas are also, typically, the lowest cost customers. Whereas a LEC has an obligation to serve all customers, entrants and competitors can and do target their investments, facilities, operations and sales/marketing efforts at these market segments with the highest expected returns.

As of 1994, at least one CAP, and often two or more CAPs, were operating in most major metropolitan areas. CAPs serve 44 of the top 50 metropolitan statistical areas (MSAs) and all 25 of the top 25 MSAs. $ ^{45} $ The top 25 MSAs contain 43% of the US population and the top 50 MSAs contain 68% of the US population. Both Teleport and MFS, the two largest CAPs, are growing by expanding the number of cities they serve, and by increasing the geographic coverage and their market share in the cities they serve. Currently, CAPs target customers located in business districts, often adding customers on a building-by-building basis. CAPs have expanded beyond central business districts to serve peripheral business centers in major metropolitan areas and many small cities as well.

The marketing strategy of targeting high-volume, low-cost customers enables CAPs to grow rapidly. CAP revenues increased by 43% between 1992 and 1993; $ ^{46} $ Some sources expect CAP revenue to more than triple between 1993 to 1996. $ ^{47} $ With rapidly increasing revenue and vast market potential, CAPs are rapidly expanding their networks and adding switching equipment. The FCC's Fiber Deployment Update shows that CAP networks have increased their route miles by 24 times between 1987 and 1992. In fact, the annual route growth rate for MFS and Teleport, two of the largest CAPs, equaled 65.9% and 94.3% respectively between 1987 and 1992. The CAP investment in local loop networks is now well in excess of 1 billion. $ ^{48} $
### C. Effects of Access Competition on Prices and Market Share

Historically, access usage rates have been used by regulators in the U.S. to subsidize the price of basic exchange telephone service (i.e., to recover some of the non-traffic sensitive costs of providing network access. In the absence of competition, this policy was, however inefficient, at least sustainable. With the advent of competition in access services, it is not. Growing competition in special access services from CAPs, IXCs, and self-suppliers has forced LECs to lower their prices to prevent even faster loss of revenues. Since 1988, for example, Pacific Bell has reduced the price of DS-1 service from $738 to $411 per month, a 44% decline, as shown in Figure 3.

Figure 3: Pacific Bell DS-1 Access Prices, 1988-1994 (6 Miles)

Source: Pacific Bell

In addition, given the ability to substitute special for switched access, the decline in HiCap prices increases competitive pressures on switched access rates. Figure 4 illustrates this direct economic link between special and switched access prices. The price of special access is a constant per month, with virtually unlimited usage, while switched access is based on minutes of use (MOU). The two price lines in Figure 4 show how much a customer would pay for a given usage volume; the crossing point of the two lines is the volume at which it is more economical for the user to purchase dedicated access (the "break-even" point). Because LECs have had to reduce their dedicated access prices to meet the stiff competition from CAPs, the "break-even" between switched and dedicated access occurs at a much lower volume and the effective price paid by customers is thereby reduced.
Figure 4: Pacific Bell Price Reductions in Special, Switched Access Services

Source: Pacific Bell

Through self-supply of facilities and the use of LEC's HiCap circuits, IXCs, CAPs and self-suppliers carry a significant portion of their customers' originating access minutes. Competition lowers both originating and terminating minutes of use, but has a much more dramatic impact on originating minutes. Figure 5 demonstrates that access competition has created a noticeable gap between the reported growth rates of originating and terminating minutes. $ ^{49} $ Since 1990, growth of originating minutes has remained flat, while terminating minutes have grown at an average annual rate of 13%. The "lost" originating minutes (depicted by the shaded region in Figure 5) represent traffic carried by competitors.
Figure 5: Competitive Loss of Originating Access Minutes

Source: Pacific Bell

Although the percentage of CAP revenues relative to LEC operating revenue remains small, the competitive presence of CAPs in certain services is much larger. Quality Strategies recently analyzed LEC high capacity service (special access and intraLATA point-to-point services for DS0, DS1, DS3, etc.) losses to competitive parts of ten metropolitan areas in five large LEC territories. Based on over 4,500 surveys, they found that CAPs have captured approximately 30% of high capacity transport services. CAP penetration rates vary in different geographic areas. For instance, CAPs have captured 33% of high capacity transport services in Philadelphia, 28% in Pittsburgh, 27% in Washington, D.C., and 24% in Baltimore. A recent study conducted for Pacific Telesis concludes that CAPs have captured 36% and 32% of revenue for high capacity transport services from point (customer or POP) to point in downtown Los Angeles and San Francisco, respectively. Similarly, CAPs have captured 43% of high capacity transport services in New York City and 36% in Boston. Thus, CAPs have a significant current presence in the provision of those services that generate substantial LEC revenues.
### V. Competition and Public Policies in Exchange Services

### A. Competition in Exchange Services

1. PBXs, VSATs and Private Networks

Because user demands are so highly concentrated in telecommunications services, one of the most important forms of competition is “self-supply” or “contract carriage” by large, intensive users. Increasingly, intra-office switched services for voice and data are being performed by private branch exchange (PBX) systems and private networks. PBX systems compete with LEC Centrex systems because PBX systems allow the user to perform switching functions for intra-office communications without going through the LEC’s central office. This facilitates the efficient routing of voice and data within the office environment, and allows the customer considerable freedom in personalizing the features of its phone system. The installed base of PBX systems was estimated at 29.3 million lines in 1993 while Centrex systems totaled 8.9 million lines. Among systems with 1,000 lines or fewer, PBX outnumbers Centrex on a five-to-one basis. Sales of PBX equipment currently total almost 1 billion annually. $ ^{50} $

By joining their PBX network to a CAP's network or using microwave facilities to connect with IXCs, business customers can achieve a larger degree of LEC bypass. This combination removes the LEC from the provision of intra-office telephony, private-line and special-access services, and some switched services (for connections with other direct customers of the CAP or IXC). Private customer networks, which constitute another form of bypass, are also increasing in popularity. These networks connect distinct physical locations of a firm or institution such as a university, government agency, or hospital. They have the capabilities of an intra-office PBX system plus a trunk, microwave, or satellite facility to connect various locations of an organization. Some of these systems effectively bypass both the local and interexchange carrier in the provision of telephony services for voice and data.

One type of private network is the VSAT (Very Small Aperture Network) which uses satellite transmissions to convey voice and data, most of which are owned by or operated on a private contractual basis for a single user or affiliated group of users. In 1991, more than 270 VSAT networks were in existence, connecting more than 67,000 terminals. $ ^{51} $ The number of VSAT systems has increased markedly in recent years, bypassing both access and interexchange carriers. $ ^{52} $ In 1993,
the number of VSAT terminals were estimated at 103,000, representing a growth rate of 54% in two years. Satellite revenues from VSAT services have grown in recent years at a 27.5% annual rate. $ ^{53,54} $ VSAT systems are used by large retailers to obtain credit information and convey point-of-sale business data for improved efficiency in purchasing, inventory, and account management. $ ^{55} $

### 2. Cellular Carriers

Wireless telephony is currently replacing some of the access and switching functions offered by LECs' wired networks. Companies offer wireless technology for the paging and dispatch services and voice communications desired by certain types of individuals that are frequently away from their offices or residences. Cellular providers have primarily targeted those customers that derive added value from the use of telephony services in non-fixed locations. In general, these wireless customers fit the profile of high-volume, multiple-service telephony users, and thus represent a potentially significant revenue source for LECs. Cellular revenue grew by 600% from 1988 to 1993, when it reached 6 billion. The number of cellular subscribers grew by eight-fold over the same period. $ ^{56} $ Cumulative capital investment in the cellular industry is now almost 14 billion, implying that the cellular infrastructure is becoming increasingly well-positioned to compete against wired telephony. Dramatic increases in market penetration and usage show that cellular service increasingly competes with wireline, especially for intensive users who get high value-added from communications, and

reported to regulatory authorities. Similarly, IXCs self-supply direct access to large customers, which traffic is not reported or included in market share estimates.

$ ^{53} $ U.S. Industrial Outlook, 1993, 1994.

$ ^{54} $ The largest VSAT network is General Motors' Pulsat Network, which contains more than 10,000 terminals. Other examples include the networks of Chevron, Chase Manhattan Bank, Dow Jones, Wal-Mart, K-Mart, J.C. Penney, Associated Press, Reuters, American Airlines, and Enterprise Rent-A-Car. Huber, The Geodesic Network II, 1992.

$ ^{55} $ Chevron and K-Mart use VSAT technology to relay credit card purchase information from customers to their credit database. National Petroleum News, November, 1993. Chevron, Scientific-Atlanta, Wal-Mart, Target Stores, Holiday Inn, Toyota, TV Answer, Chrysler, and GM affiliated services EDS and Pulsat all use Ku-band VSAT networks. Satellite Communications, July, 1993. Wal-Mart Stores, J.C. Penney Co., Circuit City, and Kmart Corp. all use satellite telecommunications for point-of-sale business transactions. Staples, Inc., Chevron, and Merrill Lynch are also VSAT users. Investor's Business Daily, February 23, 1993.

$ ^{56} $ Cellular telephony’s astounding growth is expected to continue. Link Resources Corp. estimates that the annual growth rate for cellular voice services through the year 1998 will be 20.2% and that the corresponding rate for cellular data services will be approximately 33.0%. Wall St. Journal, February 11, 1994, p. R5.
users who need site-specific access for short duration. $ ^{57} $ Prices for cellular equipment and services have been dropping rapidly, $ ^{58} $ and cellular companies are investing heavily to expand and enhance their networks. $ ^{59} $ Rapid growth in the cellular industry is expected to continue to be driven by increased network capacity and competition. $ ^{60} $

Recent studies have also shown that use of cellular and land-line services are becoming more competitive, particularly for business or rural customers. For instance, a recent analysis of business calling in California shows that if all cellular access was considered to be business access lines and those are added to LEC business access lines, cellular access lines would account for 30% of business access lines. $ ^{61} $ In addition, a recent study conducted for GTE found that for local subscribers to a small exchange in rural Wisconsin, cellular service was actually cheaper than wireline services for many residence and business users. $ ^{62} $

In recent years, the price of cellular telephones has dropped seven-fold, and the inflation adjusted price of equipment and service has fallen by more than 50 percent, according to estimates by the Eastern Research Corporation. $ ^{63} $ Trends such as these support the contention in a recent Wall