FOR YOUR INFORMATION...........................OCTOBER 27, 1993
FTC STAFF URGES WEIGHING OF COSTS AND BENEFITS
IN LONG-DISTANCE PRICE CAP PROCEEDING
The benefits of a streamlined regulatory framework should be
balanced against the potential welfare loss from the exercise of
market power in analyzing whether to relax rate restrictions on
certain long-distance services currently imposed by the Federal
Communications Commission, staff of the Federal Trade Commission
said in comments made public today. Staff of the FTC's Bureau of
Economics submitted the comments in response to a request by the
FCC with regard to a proposal that would, among other things,
remove price caps from, and streamline FCC regulation of,
optional long-distance calling plans and commercial long-distance
services. The proposal stems from the FCC's continuing efforts
to tailor its regulation of telecommunications to the
increasingly-competitive long-distance market.
To assist the transition of long-distance services to full
competition, the FCC adopted a price-cap regulatory framework in
1989. "Basket 1" telephone services include traditional long
distance, "calling card" and international calling services, and
are purchased primarily by residential and small-business
customers. Optional calling plans, which are also included in
Basket 1, offer discounted, residential long-distance service for
a minimum charge or use-commitment by the consumer. They include
AT&T's "ReachOut America," MCI's "Friends and Family" and
Sprint's "the Most plan." Basket 2 and 3 services comprise "800"
service and private lines that are purchased primarily by large
businesses. Most of the services included in Basket 2 and 3
services were shifted to streamlined regulation in 1991 and 1993.
- more -
(FCC AT&T Comment--10/27/93)
The FTC staff comments are based on an empirical analysis of
market power in the Basket 1 long-distance market, conducted by
FTC staff economist, Michael R. Ward. The analysis estimates the
drop in demand that AT&T would experience if it increased its
price of Basket 1 services. The results of the FTC staff
analysis suggest that the market for Basket 1 -- thought to be
less competitive than Baskets 2 and 3 -- is nonetheless quite
competitive, according to data from 1988-1991 for AT&T, MCI and
Sprint. The potential "welfare" loss -- resulting from a
declining consumer demand reacting to an increasing price for
service -- if an unregulated AT&T raises prices is estimated to
be between .25 percent and 1.26 percent of annual industry
revenues (i.e., between $138 million to $696 million per year),
according to the FTC staff analysis. Further, to the extent that
competition for optional calling plan customers and commercial
services customers is more vigorous than for other Basket 1
services, potential welfare costs due to supra-competitive AT&T
prices for these services would be even less, the FTC staff
comments state. Optional calling plans tend to offer discounts
to high-volume callers who, the FTC staff said, tend to have
larger monthly phone bills and, therefore, have more to gain from
searching for lower prices.
The benefits from streamlining regulation, the FTC staff
said, could also include savings in administrative costs; the
expedition of "new services and price reductions"; an increase in
AT&T's ability "to react to market conditions and customer
demands" with more flexible pricing; a decrease in "regulatory
delay and uncertainty"; an increase in competitive pressures on
AT&T's competitors; and an increase in "AT&T's incentives to
initiate pro-consumer price and service changes."
In conclusion, the FTC staff said, "if the benefits of
streamlining outweigh the potential welfare costs from a possible
increase in the opportunity for AT&T to exercise market power,
then streamlining would enhance total economic efficiency."
These comments represent the views of the FTC's Bureau of
Economics and not necessarily the views of the Commission or any
individual Commissioner. The five-member Commission vote to
issue the comment was 4-0, with Commissioner Roscoe B. Starek,
III, recused.
Copies of the comments are available from the FTC's Public
Reference Branch, Room 130, 6th Street and Pennsylvania Avenue,
N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing
impaired 1-866-653-4261.
# # #
MEDIA CONTACT: Howard Shapiro, Office of Public Affairs
202-326-2176
STAFF CONTACT: Michael R. Ward, Bureau of Economics
202-326-2096
(FTC Matter No. V930026) (FCCAT&T)