A consumer-welfare approach to the mandatory unbundling of telecommunications networks

Yale Law Journal

Volumn 109, Issue 3, 1999, Pages 417-504

  Hausman, Jerry A ^a   Sidak, J Gregory ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0010332510     PISSN: 00440094     EISSN: None     Source Type: Journal    
DOI: 10.2307/797409     Document Type: Article

References (314)

1. 119 S. Ct. 721 (1999).
2. Section 251(d)(2) provides in full: In determining what network elements should be made available for purposes of subsection (c)(3) of this section, the Commission shall consider, at a minimum, whether -(A) access to such network elements as are proprietary in nature is necessary; and (B) the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer. 47 U.S.C.A. § 251(d)(2) (West Supp. 1999).
3. Second Further Notice of Proposed Rulemaking, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, FCC 99-70, ¶ 21 (released Apr. 16, 1999), available in 1999 WL 221834 ("We nevertheless seek comment on the significance of the essential facilities standard under section 251(d)(2)."); id. ¶ 22 ("We ask parties to describe [the essential facilities doctrine] and how it should be applied, if it all, to the determination of which network elements incumbent LECs must provide on an unbundled basis.").
4. See 47 U.S.C.A. §§ 251-252. For detailed discussions of this open-access regulation, see ALFRED E. KAHN, LETTING GO: DEREGULATING THE PROCESS OF DEREGULATION 47-53, 90-96 (1998); J. GREGORY SIDAK & DANIEL F. SPULBER, DEREGULATORY TAKINGS AND THE REGULATORY CONTRACT (1997); Robert G. Harris & C. Jeffrey Kraft, Meddling Through: Regulating Local Telephone Competition in the United States, J. ECON. PERSP., Fall 1997, at 93, 102-11; and J. Gregory Sidak & Daniel F. Spulber, The Tragedy of the Telecommons: Government Pricing of Unbundled Network Elements Under the Telecommunications Act of 1996, 97 COLUM. L. REV. 1081 (1997). For an analysis of unbundling policy pursued through antitrust law rather than through regulation, see Abbott B. Lipsky, Jr. & J. Gregory Sidak, Essential Facilities, 51 STAN. L. REV. 1187 (1999).
5. See 47 U.S.C.A. §§ 251-252. For detailed discussions of this open-access regulation, see ALFRED E. KAHN, LETTING GO: DEREGULATING THE PROCESS OF DEREGULATION 47-53, 90-96 (1998); J. GREGORY SIDAK & DANIEL F. SPULBER, DEREGULATORY TAKINGS AND THE REGULATORY CONTRACT (1997); Robert G. Harris & C. Jeffrey Kraft, Meddling Through: Regulating Local Telephone Competition in the United States, J. ECON. PERSP., Fall 1997, at 93, 102-11; and J. Gregory Sidak & Daniel F. Spulber, The Tragedy of the Telecommons: Government Pricing of Unbundled Network Elements Under the Telecommunications Act of 1996, 97 COLUM. L. REV. 1081 (1997). For an analysis of unbundling policy pursued through antitrust law rather than through regulation, see Abbott B. Lipsky, Jr. & J. Gregory Sidak, Essential Facilities, 51 STAN. L. REV. 1187 (1999).
6. See 47 U.S.C.A. §§ 251-252. For detailed discussions of this open-access regulation, see ALFRED E. KAHN, LETTING GO: DEREGULATING THE PROCESS OF DEREGULATION 47-53, 90-96 (1998); J. GREGORY SIDAK & DANIEL F. SPULBER, DEREGULATORY TAKINGS AND THE REGULATORY CONTRACT (1997); Robert G. Harris & C. Jeffrey Kraft, Meddling Through: Regulating Local Telephone Competition in the United States, J. ECON. PERSP., Fall 1997, at 93, 102-11; and J. Gregory Sidak & Daniel F. Spulber, The Tragedy of the Telecommons: Government Pricing of Unbundled Network Elements Under the Telecommunications Act of 1996, 97 COLUM. L. REV. 1081 (1997). For an analysis of unbundling policy pursued through antitrust law rather than through regulation, see Abbott B. Lipsky, Jr. & J. Gregory Sidak, Essential Facilities, 51 STAN. L. REV. 1187 (1999).
7. See 47 U.S.C.A. §§ 251-252. For detailed discussions of this open-access regulation, see ALFRED E. KAHN, LETTING GO: DEREGULATING THE PROCESS OF DEREGULATION 47-53, 90-96 (1998); J. GREGORY SIDAK & DANIEL F. SPULBER, DEREGULATORY TAKINGS AND THE REGULATORY CONTRACT (1997); Robert G. Harris & C. Jeffrey Kraft, Meddling Through: Regulating Local Telephone Competition in the United States, J. ECON. PERSP., Fall 1997, at 93, 102-11; and J. Gregory Sidak & Daniel F. Spulber, The Tragedy of the Telecommons: Government Pricing of Unbundled Network Elements Under the Telecommunications Act of 1996, 97 COLUM. L. REV. 1081 (1997). For an analysis of unbundling policy pursued through antitrust law rather than through regulation, see Abbott B. Lipsky, Jr. & J. Gregory Sidak, Essential Facilities, 51 STAN. L. REV. 1187 (1999).
8. See 47 U.S.C.A. §§ 251-252. For detailed discussions of this open-access regulation, see ALFRED E. KAHN, LETTING GO: DEREGULATING THE PROCESS OF DEREGULATION 47-53, 90-96 (1998); J. GREGORY SIDAK & DANIEL F. SPULBER, DEREGULATORY TAKINGS AND THE REGULATORY CONTRACT (1997); Robert G. Harris & C. Jeffrey Kraft, Meddling Through: Regulating Local Telephone Competition in the United States, J. ECON. PERSP., Fall 1997, at 93, 102-11; and J. Gregory Sidak & Daniel F. Spulber, The Tragedy of the Telecommons: Government Pricing of Unbundled Network Elements Under the Telecommunications Act of 1996, 97 COLUM. L. REV. 1081 (1997). For an analysis of unbundling policy pursued through antitrust law rather than through regulation, see Abbott B. Lipsky, Jr. & J. Gregory Sidak, Essential Facilities, 51 STAN. L. REV. 1187 (1999).
9. First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499 (1996). This order was vacated in part by the Eighth Circuit; the Supreme Court then modified the Eighth Circuit's decision in Iowa Utilities Board. See Iowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997), rev'd in part and aff'd in part sub nom. AT&T Corp. v. Iowa Utils. Bd., 119 S. Ct. 721 (1999).
10. See Iowa Utils. Bd., 119 S. Ct. at 734-36.
11. See Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 842-45 (1984).
12. Endorsing Justice Breyer's analogy to the essential facilities doctrine as "inescapable" logic, Professor Hovenkamp writes: The principal purpose of the 1996 Telecommunications Act is to deregulate, and deregulation can be accomplished only by minimizing the occasions for regulatory supervision. Competition requires that inputs economically capable of being supplied competitively - that is, by numerous independent sources - be supplied in that manner. Forced sharing of such inputs acts as a disincentive to producing them competitively in the first place and exacerbates and prolongs agency supervision. PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶ 787'c, at 247 (Supp. 1999).
13. This principle is well established in antitrust law. See, e.g., NCAA v. Board of Regents, 468 U.S. 85, 107 (1984); Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979) (citing ROBERT H. BORK, THE ANTITRUST PARADOX 66 (1978)). For special application of the consumer-welfare criterion to industries undergoing deregulation, see Stephen G. Breyer, Antitrust, Deregulation, and the Newly Liberated Marketplace, 75 CAL. L. REV. 1005 (1987).
14. Telecommunications Act of 1996, Pub. L. No. 104-104, pmbl., 110 Stat. 56, 56.
15. Two years before passage of the Telecommunications Act of 1996, Professor William J. Baumol and one of the present authors wrote: [R]egulators considerably influence the firm's demand elasticity by their decisions and policies that affect the firm's actual or potential competitors. Clearly, severe constraint of firms' entry and pricing will somewhat immunize each enterprise from the competitive pressures of others. That immunity from competition will reduce the elasticity of each supplier's demand - that is, it will reduce the loss of business that results from a rise in its prices. The firm's price elasticity of demand thus must be said to be endogenously determined by the regulatory process itself . . . . It appears especially clear in telecommunications that a firm's price elasticity of demand is endogenously determined by its regulatory environment. WILLIAM J. BAUMOL & J. GREGORY SIDAK, TOWARD COMPETITION IN LOCAL TELEPHONY 40-41 (1994).
16. Our previous writings have emphasized the equivalence between the public-interest standard and a consumer-welfare standard. See id.; JERRY HAUSMAN, TAXATION BY TELECOMMUNICATIONS REGULATION: THE ECONOMICS OF THE E-RATE 4 (1998); SIDAK & SPULBER, supra note 4, at 309-10, 340; Jerry Hausman, Valuing the Effect of Regulation on New Services in Telecommunications, 1997 BROOKINGS PAPERS ON ECON. ACTIVITY: MICROECONOMICS 1; Jerry Hausman & Howard A. Shelanski, Economic Welfare and Telecommunications Welfare: The E-Rate Policy for Universal Service Subsidies, 16 YALE J. ON REG. 19, 26-29 (1999); J. Gregory Sidak, Telecommunications in Jericho, 81 CAL. L. REV. 1209, 1234-38 (1993) (review essay).
17. Our previous writings have emphasized the equivalence between the public-interest standard and a consumer-welfare standard. See id.; JERRY HAUSMAN, TAXATION BY TELECOMMUNICATIONS REGULATION: THE ECONOMICS OF THE E-RATE 4 (1998); SIDAK & SPULBER, supra note 4, at 309-10, 340; Jerry Hausman, Valuing the Effect of Regulation on New Services in Telecommunications, 1997 BROOKINGS PAPERS ON ECON. ACTIVITY: MICROECONOMICS 1; Jerry Hausman & Howard A. Shelanski, Economic Welfare and Telecommunications Welfare: The E-Rate Policy for Universal Service Subsidies, 16 YALE J. ON REG. 19, 26-29 (1999); J. Gregory Sidak, Telecommunications in Jericho, 81 CAL. L. REV. 1209, 1234-38 (1993) (review essay).
18. Our previous writings have emphasized the equivalence between the public-interest standard and a consumer-welfare standard. See id.; JERRY HAUSMAN, TAXATION BY TELECOMMUNICATIONS REGULATION: THE ECONOMICS OF THE E-RATE 4 (1998); SIDAK & SPULBER, supra note 4, at 309-10, 340; Jerry Hausman, Valuing the Effect of Regulation on New Services in Telecommunications, 1997 BROOKINGS PAPERS ON ECON. ACTIVITY: MICROECONOMICS 1; Jerry Hausman & Howard A. Shelanski, Economic Welfare and Telecommunications Welfare: The E-Rate Policy for Universal Service Subsidies, 16 YALE J. ON REG. 19, 26-29 (1999); J. Gregory Sidak, Telecommunications in Jericho, 81 CAL. L. REV. 1209, 1234-38 (1993) (review essay).
19. Our previous writings have emphasized the equivalence between the public-interest standard and a consumer-welfare standard. See id.; JERRY HAUSMAN, TAXATION BY TELECOMMUNICATIONS REGULATION: THE ECONOMICS OF THE E-RATE 4 (1998); SIDAK & SPULBER, supra note 4, at 309-10, 340; Jerry Hausman, Valuing the Effect of Regulation on New Services in Telecommunications, 1997 BROOKINGS PAPERS ON ECON. ACTIVITY: MICROECONOMICS 1; Jerry Hausman & Howard A. Shelanski, Economic Welfare and Telecommunications Welfare: The E-Rate Policy for Universal Service Subsidies, 16 YALE J. ON REG. 19, 26-29 (1999); J. Gregory Sidak, Telecommunications in Jericho, 81 CAL. L. REV. 1209, 1234-38 (1993) (review essay).
20. See 1992 Horizontal Merger Guidelines, 57 Fed. Reg. 41,552, 41,560-61 (1992).
21. The seminal article is William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937, 944-45 (1981).
22. See 5 ALFRED MARSHALL, PRINCIPLES OF ECONOMICS 381-93 (1922). For other explications of Marshall's rules of derived demand, see P.R.G. LAYARD & A.A. WALTERS, MICROECONOMIC THEORY 259-72 (1978). Derived demand is similar to, but distinguishable from, residual demand in the sense that the latter focuses on the demand for the end product and is calculated for any given firm by subtracting the supply of other firms from the market demand. See DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 100 (2d ed. 1994).
23. See 5 ALFRED MARSHALL, PRINCIPLES OF ECONOMICS 381-93 (1922). For other explications of Marshall's rules of derived demand, see P.R.G. LAYARD & A.A. WALTERS, MICROECONOMIC THEORY 259-72 (1978). Derived demand is similar to, but distinguishable from, residual demand in the sense that the latter focuses on the demand for the end product and is calculated for any given firm by subtracting the supply of other firms from the market demand. See DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 100 (2d ed. 1994).
24. See 5 ALFRED MARSHALL, PRINCIPLES OF ECONOMICS 381-93 (1922). For other explications of Marshall's rules of derived demand, see P.R.G. LAYARD & A.A. WALTERS, MICROECONOMIC THEORY 259-72 (1978). Derived demand is similar to, but distinguishable from, residual demand in the sense that the latter focuses on the demand for the end product and is calculated for any given firm by subtracting the supply of other firms from the market demand. See DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 100 (2d ed. 1994).
25. See GEORGE J. STIGLER, THE THEORY OF PRICE 252-55 (4th ed. 1987).
26. Many books have been written about the AT&T breakup. See, e.g., ROBERT W. CRANDALL, AFTER THE BREAKUP: U.S. TELECOMMUNICATIONS IN A MORE COMPETITIVE ERA (1991); PAUL W. MACAVOY, THE FAILURE OF ANTITRUST AND REGULATION TO ESTABLISH COMPETITION IN LONG-DISTANCE TELEPHONE SERVICES (1996); PETER TEMIN, THE FALL OF THE BELL SYSTEM: A STUDY IN PRICES AND POLITICS (1987).
27. Many books have been written about the AT&T breakup. See, e.g., ROBERT W. CRANDALL, AFTER THE BREAKUP: U.S. TELECOMMUNICATIONS IN A MORE COMPETITIVE ERA (1991); PAUL W. MACAVOY, THE FAILURE OF ANTITRUST AND REGULATION TO ESTABLISH COMPETITION IN LONG-DISTANCE TELEPHONE SERVICES (1996); PETER TEMIN, THE FALL OF THE BELL SYSTEM: A STUDY IN PRICES AND POLITICS (1987).
28. Many books have been written about the AT&T breakup. See, e.g., ROBERT W. CRANDALL, AFTER THE BREAKUP: U.S. TELECOMMUNICATIONS IN A MORE COMPETITIVE ERA (1991); PAUL W. MACAVOY, THE FAILURE OF ANTITRUST AND REGULATION TO ESTABLISH COMPETITION IN LONG-DISTANCE TELEPHONE SERVICES (1996); PETER TEMIN, THE FALL OF THE BELL SYSTEM: A STUDY IN PRICES AND POLITICS (1987).
29. Modification of Final Judgment, in United States v. American Tel. & Tel. Co., 552 F. Supp. 131, 226-34 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983). The settlement was a "modification" of an earlier "final judgment" in the sense that it modified a consent decree into which AT&T and the government had entered in 1956.
30. For an exhaustive discussion of the administration of the MFJ, see MICHAEL K. KELLOGG ET AL., FEDERAL TELECOMMUNICATIONS LAW 199-248 (1992).
31. For instance, the New England and New York Telephone Companies became part of NYNEX, which subsequently merged with Bell Atlantic. Recent and pending mergers are likely to lead to four remaining RBOCs with GTE, the largest independent company, merging with Bell Atlantic; U S WEST, the smallest RBOC, merging with Qwest, a new long-distance company; SBC acquiring Ameritech (after having acquired Pacific Telesis); and BellSouth remaining independent but with an equity interest in Qwest. AT&T divested its equipment manufacturing company, now called Lucent, in 1998. For an early explanation of the economic rationale behind this very successful divestiture, see Jerry A. Hausman & Elon Kohlberg, The Future Evolution of the Central Office Switch Industry, in FUTURE COMPETITION IN TELECOMMUNICATIONS 193 (Stephen P. Bradley & Jerry A. Hausman eds., 1989).
32. See SIDAK & SPULBER, supra note 4, at 55-99.
33. See Modification of Final Judgment § II.D, 552 F. Supp. at 227-28. Information services were defined to be the interaction of computer services and telecommunications.
34. To "cross-subsidize" means to set prices below incremental cost. See, e.g., BAUMÖL & SIDAK, supra note 11, at 62. In actuality, long-distance service had long cross-subsidized local service at the direction of regulators, and so the Department of Justice's theory was incorrect. The amount of the cross-subsidy had increased greatly as the cost of providing long-distance service fell rapidly after 1950, with regulators refusing to allow long-distance prices to fall as rapidly. See CRANDALL, supra note 17, at 24-27. MCI recognized the economic opportunity of providing long-distance service when prices far exceeded costs and regulators would not permit a reduction in prices by the regulated company. Events soon after divestiture made evident the direction of cross-subsidy from long-distance to local, as the FCC established above-cost access fees (in actuality, a tax) on long-distance to continue the cross-subsidy to local service. See TEMIN, supra note 17, at 306-17.
35. Modification of Final Judgment § VIII.C, 552 F. Supp. at 231.
36. Ironically, 1976 was the year of the introduction of both digital electronic switches and fiber-optic transmission. MCI, the first long-distance competitor of AT&T, had based its long-distance service on microwave transmission (hence the name from which "MCI" was derived: Microwave Communications, Inc.), but this technology was becoming obsolete at the time of the AT&T trial.
37. See Paul H. Rubin & Hashem Dezhbakhsh, Costs of Delay and Rent-Seeking Under the Modification of Final Judgment, 16 MANAGERIAL & DECISION ECON. 385, 385-87 (1995).
38. See id. at 392.
39. See id. at 389, 392.
40. See Hausman, supra note 12, at 13-24.
41. See Jerry A. Hausman, Competition in Long-Distance and Telecommunications Equipment Markets: Effects of the MFJ, 16 J. MANAGERIAL & DECISION ECON. 365 (1995).
42. For a recent review praising the MFJ, see Paul L. Joskow & Roger G. Noll, The Bell Doctrine: Application in Telecommunications, Electricity, and Other Network Industries, 51 STAN. L. REV. 1249, 1271-78 (1999). Joskow and Noll, however, conspicuously fail to consider the MFJ's deleterious effect on consumer welfare.
43. See, e.g., MACAVOY, supra note 17, at 31-34.
44. All other ILECs, except the BOCs, have been permitted to provide long-distance service. Indeed, SNET, the local telephone company in Connecticut, which for historic reasons was not considered a BOC by the MFJ, has been quite successful in providing long-distance service at generally lower prices than AT&T has offered to Connecticut residential customers.
45. See 47 U.S.C.A. § 271(c)(2)(B) (West Supp. 1999).
46. Compare PETER W. HUBER ET AL., THE TELECOMMUNICATIONS ACT OF 1996: SPECIAL REPORT 32-33 (1996) (describing the requirements a Bell company must now meet to receive interexchange relief under the Act), with MACAVOY, supra note 17, at 190-200 (describing companies' experiences with the interLATA restrictions before the Telecommunications Act of 1996).
47. See 47 U.S.C.A. § 271(c)(1)(A). Alternatively, if the state PUC had approved a generic interconnection plan offered by the RBOC, but the RBOC had received no request for interconnection within the first seven months after enactment of the Telecommunications Act of 1996, then the RBOC would have been entitled to be evaluated under the checklist. See id. § 27(c)(1)(B).
48. See id. § 271(d)(3).
49. Commands to honor the "public interest" pervade the Telecommunications Act of 1996. It has long been recognized that advancing the "public interest" is the touchstone of telecommunications regulation in the United States. See generally sources cited supra note 12.
50. See 47 U.S.C.A. § 271(d)(6)(B).
51. Using a long-distance elasticity estimate of -0.723 and an economic model of AT&T's price leadership in residential long-distance service, one of us has computed that BOC entry will decrease long-distance prices by at least 15% to 25%. See Declaration of Professor Jerry A. Hausman, Second Application by BellSouth Corporation et al. for Provision of In-Region, InterLATA Services in Louisiana, FCC 98-121, ¶ 15 (filed July 9, 1998) (on file with The Yale Law Journal).
52. MACAVOY, supra note 17, at 176.
53. 47 U.S.C.A. §§ 251-252. In addition, Congress abolished any remaining legal barriers to entry: "No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service." Id. § 253(a).
54. If the entrant and the ILEC cannot negotiate mutually acceptable terms of interconnection, resale, or unbundling, then the Telecommunications Act directs the state PUC to resolve the dispute through compulsory arbitration. See id. § 252(b). By the fall of 1996, entrants and ILECs were unable to reach any voluntary agreements on the pricing of resale and unbundled network elements. As a consequence, hundreds of arbitration proceedings began in the fall of 1996. In most cases, each arbitration was a one-on-one proceeding between a single entrant and the ILEC.
55. See id. § 251(f).
56. Section 251(c)(3) provides that "[i]n addition to the duties contained in subsection [251(b)], each incumbent local exchange carrier" has certain other duties, including: (3) Unbundled access. - The duty to provide, to any requesting telecommunications carrier for the provision of a telecommunications service, nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory in accordance with the terms and conditions of the agreement and the requirements of this section and section 252 of this title. An incumbent local exchange carrier shall provide such unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service. Id. § 251(c)(3).
57. Id. § 251(d)(2).
58. Telecommunications Act of 1996, Pub. L. No. 104-104, pmbl., 110 Stat. 56, 56.
59. H.R. REP. NO. 104-458, at 1 (1996).
60. 47 U.S.C.A. § 251(d)(2)(A).
61. First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499 (1996).
62. Id. ¶ 282. An ILEC's signaling protocols that adhere to Bellcore standards, however, were not proprietary in the FCC's view because they are industry-wide protocols. See id. ¶ 481.
63. Id. ¶ 282.
64. Id.
65. Id. ¶ 283.
66. Id. ¶ 11.
67. Id. ¶ 285 (quoting RANDOM HOUSE COLLEGE DICTIONARY 665 (rev. ed. 1984)).
68. Id. ¶ 285.
69. See id. ¶ 366 (to have been codified at 47 C.F.R. § 51.319).
70. See Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 843-44 (1984) (giving "controlling weight" to regulations devised by agencies pursuant to a congressional grant of authority "unless they are arbitrary, capricious or manifestly contrary to the statute"). See generally STEPHEN G. BREYER ET AL., ADMINISTRATIVE LAW AND REGULATORY POLICY: PROBLEMS, TEXT, AND CASES 256-57 (4th ed. 1999) (explaining Chevron).
71. See Iowa Utils. Bd. v. FCC, 120 F.3d 753, 810-12 (8th Cir. 1997), rev'd in part and aff'd in part sub nom. AT&T Corp. v. Iowa Utils. Bd., 119 S. Ct. 721 (1999).
72. See FCC v. Iowa Utils. Bd., 118 S. Ct. 683 (1998). The other grounds for appeal included the fact that state PUCs, and not the FCC, had jurisdiction to promulgate these rules, and that the substantive pricing standards that the FCC had adopted were so low as to effect an uncompensated taking of the property of ILECs in violation of the Fifth Amendment.
73. 119 S. Ct. 721.
74. See 47 U.S.C.A. § 251(c)(3) (West Supp. 1999). The Court, however, affirmed other aspects of the First Report and Order, including provisions relating to the pricing of unbundled network elements. See Iowa Utils. Bd., 119 S. Ct. at 732-33.
75. Iowa Utils. Bd., 119 S. Ct. at 736.
76. Id. at 726.
77. Id. at 738.
78. Id. at 734.
79. Id. at 734-35 (emphasis added) (citation omitted).
80. Id. at 735 (quoting First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, ¶ 283 (1996)).
81. Id. (quoting First Report and Order, 11 F.C.C.R. ¶ 285 (emphasis added by the Court)) (citation omitted).
82. Id.
83. Id.
84. Id.
85. Id.
86. See id. at 739 (Souter, J., concurring in part and dissenting in part).
87. Id. at 735 n.11 (quoting id. at 739 (Souter, J., concurring in part and dissenting in part)) (citation omitted).
88. Id. (quoting id. at 740 (Souter, J., concurring in part and dissenting in part)) (citation omitted).
89. "Economic profits are zero when total revenues equal total costs, inclusive of a competitive return on capital." SIDAK & SPULBER, supra note 4, at 313.
90. Economic rent is a return to a factor of production in excess of the payment that is necessary to prevent that factor from being redeployed to an alternative use. See, e.g., PAUL MILGROM & JOHN ROBERTS, ECONOMICS, ORGANIZATION AND MANAGEMENT 269 (1992); Armen A. Alchian, Rent, in 4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 141 (John Eatwell et al. eds., 1987).
91. Economic rent is a return to a factor of production in excess of the payment that is necessary to prevent that factor from being redeployed to an alternative use. See, e.g., PAUL MILGROM & JOHN ROBERTS, ECONOMICS, ORGANIZATION AND MANAGEMENT 269 (1992); Armen A. Alchian, Rent, in 4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 141 (John Eatwell et al. eds., 1987).
92. Iowa Utils. Bd., 119 S. Ct. at 735.
93. Id.
94. Id. at 736 (quoting First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, ¶ 278 (1996) (emphasis added by the Court)); see also id. ("[W]e conclude that the statute does not require us to interpret the 'impairment' standard in a way that would significantly diminish the obligation imposed by section 251(c)(3)." (quoting First Report and Order, 11 F.C.C.R. ¶ 286)).
95. Id.
96. Id. (quoting Iowa Utils. Bd. v. FCC, 120 F.3d at 810 (emphasis added by the Court)).
97. Id. (citation omitted). As evidence of that erroneous premise, Justice Scalia quoted the following language from the Local Competition First Report and Order: "To give effect to both sections 251(c)(3) and 251(d)(2), we conclude that the proprietary and impairment standards in section 251(d)(2) grant us the authority to refrain from requiring incumbent LECs to provide all network elements for which it is technically feasible to provide access on an unbundled basis." Id. (quoting First Report and Order, 11 F.C.C.R. ¶ 279).
98. Id.
99. Id. Justice Thomas concurred with this part of the Court's decision but wrote a separate opinion, joined by Chief Justice Rehnquist and Justice Breyer, which dissented from other parts of the Court's decision that are not pertinent to our discussion. See id. at 741-46 (Thomas, J., concurring in part and dissenting in part).
100. Id. at 746-54 (Breyer, J., concurring in part and dissenting in part). Much of Justice Breyer's opinion was devoted to his dissent from the Court's holding concerning the FCC's jurisdiction to promulgate pricing rules that were binding on the states.
101. Id. at 746, For historical analysis, Justice Breyer relied upon Justice Thomas's opinion.
102. Id.
103. Justice Breyer, of course, has made his own contributions to that scholarly literature. See, e.g., STEPHEN G. BREYER, REGULATION AND ITS REFORM (1982); Breyer, supra note 9.
104. See Iowa Utils. Bd., 119 S. Ct. at 746-47 (Breyer, J., concurring in part and dissenting in part).
105. See id. at 747.
106. Id.
107. Id. (citing 47 U.S.C.A. §§ 251(c)(2)-(4), 253(a) (West Supp. 1999)).
108. Id. at 748.
109. Id.
110. Justice O'Connor did not participate in the case. See id. at 721.
111. Id.
112. Iowa Utils. Bd., 119 S. Ct. at 749-50 (Breyer, J., concurring in part and dissenting in part).
113. Id. at 751 (citing First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, ¶¶ 672-715 (1996)).
114. Id.
115. See id. ("Nor can the FCC successfully argue that the Act requires the particular rate-setting system that its regulations contain.").
116. Id.
117. Id.
118. Id. at 752. With respect to the "the FCC's decision to prohibit use" of the efficient component-pricing rule (ECPR), Justice Breyer noted: "The FCC rejected that [ECPR] system, but in doing so it did not claim, nor did its reasoning support the claim, that the use of such a system would be arbitrary or unreasonable." Id. Of "the FCC's decision to forbid the use" of Ramsey pricing, Justice Breyer wrote: "Many experts strongly prefer the use of such a system [and some argue] that the FCC's prohibition of Ramsey pricing will 'minimize rather than maximize consumer welfare.' The FCC disfavors Ramsey pricing, but it does not explain why a contrary judgment would conflict with the statute or otherwise be arbitrary or unreasonable." Id. (quoting Sidak & Spulber, supra note 4, at 1109, and citing 1 ALFRED E. KAHN, THE ECONOMICS OF REGULATION: PRINCIPLES AND INSTITUTIONS 137-41 (rev. ed. 1988)).
119. Id. at 753.
120. Id.
121. Id.
122. Id.
123. See id. ("[T]he Act's language itself suggests some such limits.").
124. Id.
125. Id. at 753-54 (citing 1 HAROLD DEMSETZ, OWNERSHIP, CONTROL, AND THE FIRM: THE ORGANIZATION OF ECONOMIC ACTIVITY 207 (1988)).
126. Id. at 754.
127. See id. Justice Breyer's conclusion is consistent with his broader view that regulation should be subjected to rigorous cost-benefit analysis. See generally STEPHEN BREYER, BREAKING THE VICIOUS CIRCLE: TOWARD EFFECTIVE RISK REGULATION (1993).
128. Iowa Utils. Bd., 119 S. Ct. at 754 (Breyer, J., concurring in part and dissenting in part).
129. Id.
130. Id.
131. Id.
132. Id. at 739 (Souter, J., concurring in part and dissenting in part).
133. Justice Thomas wrote a dissenting opinion as well. See supra note 87.
134. Iowa Utils. Bd., 119 S. Ct. at 739 (Souter, J., concurring in part and dissenting in part).
135. Id.
136. Id. at 740.
137. If I want to replace a light bulb, I would be within an ordinary and fair meaning of the word "necessary" to say that a stepladder is "necessary" to install the bulb, even though I could stand instead on a chair, a milk can, or eight volumes of Gibbon. I could just as easily say that the want of a ladder would "impair" my ability to install the bulb under the same circumstances. Id. at 739. For Justice Scalia's comments, see supra text accompanying notes 75-77.
138. Second Further Notice of Proposed Rulemaking, supra note 3.
139. Id. ¶ 14.
140. See id. ¶¶ 16-23.
141. See Steve Rosenbush, A Boom for the Baby Bells?, BUS. WK., Nov. 1, 1999, at 47.
142. See Hausman, supra note 12.
143. BAUMÖL & SIDAK, supra note 11, at 26.
144. NCAA v. Board of Regents, 468 U.S. 85, 107 (1984); Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979).
145. See BAUMOL & SIDAK, supra note 11, at 26-27.
146. AT&T v. Iowa Utils. Bd., 119 S. Ct. 721, 754 (1999) (Breyer, J., concurring in part and dissenting in part).
147. See Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, 14 F.C.C.R. 2398, app. ¶ 13 (1999).
148. Roland Mach. Co. v. Dresser Indus., 749 F.2d 380, 395 (7th Cir. 1984) (citing Product Liab. Ins. Agency v. Crum & Forster Ins. Cos., 682 F.2d 660, 663-65 (7th Cir. 1982) (Posner, J.)).
149. Marrese v. American Academy of Orthopaedic Surgeons, 706 F.2d 1488, 1497 (7th Cir. 1983) (citing University Life Ins. Co. of America v. Unimarc Ltd., 699 F.2d 846, 853 (7th Cir. 1983) (Posner, J.); Products Liab., 682 F.2d at 663-64). In Products Liability, Chief Judge Posner wrote: "The consumer does not care how many sellers of a particular good or service there are; he cares only that there be enough to assure him a competitive price and quality." Products Liab., 682 F.2d at 664. In another antitrust decision the following year, he wrote that "competition in the antitrust sense signifies not the preservation of all existing competitors but the maintenance of a sufficient number to assure that consumers get the best possible quality of product at the lowest possible price." University Life, 699 F.2d at 852 (citing Products Liab., 682 F.2d at 663-64).
150. Interface Group v. Massachusetts Port Auth., 816 F.2d 9, 10 (1st Cir. 1987) (citation omitted).
151. 506 U.S. 447 (1993).
152. Id. at 458 (citations omitted).
153. 429 U.S. 477 (1977).
154. Id. at 489 (emphasis omitted). For similar statements of the Court following, or foreshadowing, the Brunswick articulation of "antitrust injury," see Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 338-39 (1990); Cargill, Inc. v. Monfort of Colo., 479 U.S. 104, 116-17 (1986); Associated Gen. Contractors v. California State Council of Carpenters, 459 U.S. 519, 539-40 (1983); Blue Shield v. McCready, 457 U.S. 465, 483 n.19 (1982); J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557, 562 (1981); and Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962).
155. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 6 (quoting First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, ¶¶ 282, 285 (1996)) (emphasis added).
156. See id. ¶ 20.
157. Id. ¶ 27.
158. Id. ¶ 17 (emphasis added).
159. 47 U.S.C.A. § 251(d)(2)(B) (West Supp. 1999).
160. Marrese v. American Academy of Orthopaedic Surgeons, 706 F.2d 1488, 1497 (7th Cir. 1983).
161. Id.
162. Id. at 1495-96.
163. University Life Ins. Co. of Am. v. Unimarc Ltd., 699 F.2d 846, 853 (7th Cir. 1983).
164. Id. (quoting WILLIAM SHAKESPEARE, HAMLET, act 5, sc. 2).
165. AT&T v. Iowa Utils. Bd., 119 S. Ct. 721, 754 (1999) (Breyer, J., concurring in part and dissenting in part).
166. Id. at 735.
167. See, e.g., BAUMÖL & SIDAK, supra note 11, at 7, 9, 34.
168. See First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, ¶ 682 (1996).
169. See SIDAK & SPULBER, supra note 4, at 359.
170. Id. at 565; see also J. Gregory Sidak & Daniel F. Spulber, Givings, Takings, and the Fallacy of Forward-Looking Costs, 72 N.Y.U. L. REV. 1068, 1163 (1997) (criticizing the FCC's use of TELRIC pricing).
171. The recent consolidations in the CLEC industry (for example, the merger of MCI and WorldCom) would serve as a countervailing source of market power in any voluntary negotiation. For a review of the recent mergers in the CLEC industry, see Sterling Perrin, The CLEC Market: Prospects, Problems, and Opportunities, TELECOMMUNICATIONS INT'L, Nov. 1, 1998, at 41.
172. See 47 U.S.C.A. § 271(c)(2)(B) (West Supp. 1999).
173. AT&T Corp. v. Iowa Utils. Bd., 119 S. Ct. 721, 751 (1999) (Breyer, J., concurring in part and dissenting in part).
174. See SIDAK & SPULBER, supra note 4, at 403-26, 545-51. For a discussion of the important gains that have been realized by innovation in the Internet, see Jerry A. Hausman, Telecommunications: Building the Infrastructure for Value Creation, in SENSE AND RESPOND 63 (Stephen P. Bradley & Richard L. Nolan eds., 1998).
175. See AVINASH K. DIXIT & ROBERT S. PINDYCK, INVESTMENT UNDER UNCERTAINTY (1994); Fisher Black & Myron Scholes, The Pricing of Options and Corporate Liabilities, 81 J. POL. ECON. 637 (1973).
176. See AVINASH K. DIXIT & ROBERT S. PINDYCK, INVESTMENT UNDER UNCERTAINTY (1994); Fisher Black & Myron Scholes, The Pricing of Options and Corporate Liabilities, 81 J. POL. ECON. 637 (1973).
177. See, e.g., WILLIAM F. SHARPE, INVESTMENTS 471 (3d ed. 1985).
178. For a discussion of conservation-of-value principles, see RICHARD A. BREALEY & STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 400-01 (4th ed. 1991).
179. For a discussion of particular cases in which regulations were estimated to cost U.S. consumers and businesses billions of dollars because of regulatory delay of new services, see generally Hausman, supra note 12.
180. See, e.g., A. Michael Noll, Anatomy of a Failure: Picturephone Revisited, 16 TELECOMMUNICATIONS POL'Y 307 (1992); A. Michael Noll, Conspicuous (Lack of) Consumption, TELE.COM. Feb. 8, 1999, available in 1999 WL 18391710.
181. See, e.g., A. Michael Noll, Anatomy of a Failure: Picturephone Revisited, 16 TELECOMMUNICATIONS POL'Y 307 (1992); A. Michael Noll, Conspicuous (Lack of) Consumption, TELE.COM. Feb. 8, 1999, available in 1999 WL 18391710.
182. See Jerry Hausman, Regulation by TSLRIC: Economic Effects on Investment and Innovation, MULTIMEDIA UND RECHT, Mar. 1999, at 22, 22; Hausman, supra note 12; see also SIDAK & SPULBER, supra note 4, at 375.
183. As noted in Part III, Justice Breyer warned of this perverse outcome. See supra text accompanying notes 113-114.
184. See Memorandum Opinion and Order, and Notice of Proposed Rulemaking, Deployment of Wireline Services Offering Advanced Telecommunications Capability, 13 F.C.C.R. 24,012, ¶¶ 95-100 (1998).
185. See Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 3.
186. Id. This passage is the only reference to investment or innovation in the entire Second Further Notice of Proposed Rulemaking.
187. See id. ¶ 4.
188. Local Competition (1 May 1997), No. 97-8, ¶ 74 (C.R.T.C.).
189. See id.
190. See SIDAK & SPULBER, supra note 4, at 410-12.
191. The FCC requests commentators to provide an analysis of the effect of sunk costs in defining the "necessary" and "impair" standard. See Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 26.
192. See SIDAK & SPULBER, supra note 4, at 78-82.
193. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 26.
194. See First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, ¶ 641 n.1562 (1996).
195. See Hausman, supra note 168, at 24-26; Hausman, supra note 12, at 26-35.
196. Of course, digital subscriber line (DSL) technology may allow for broadband to be offered over ILEC loops. The point is that the technological evolution of competition is sufficiently uncertain to make investment in sunk-cost elements equally uncertain.
197. A technical caveat is necessary here. In the case of an isoelastic demand curve, such as one associated with a Cobb-Douglas utility function, the price elasticity of demand is constant at all points along the (nonlinear) demand curve. Cf. JAMES M. HENDERSON & RICHARD E. QUANDT, MICROECONOMIC THEORY: A MATHEMATICAL APPROACH 111-13 (3d ed. 1980) (discussing constant elasticity of substitution of the Cobb-Douglas production function). Even in such a case of an isoelastic demand curve, however, it is still true that the FCC, by setting too low a price for the UNE, would suppress competitive supply of that element. As will become clear from our discussion infra Part V, such a regulatory distortion would make it more difficult for the ILEC to meet the "critical share" calculation, which would establish that the ILEC could not impair competition in the market for telecommunications services sold to end-users by declining to lease a particular network element to a CLEC at a TELRIC price.
198. See United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 404 (1956).
199. In the Cellophane case, the government claimed that du Pont was exercising unilateral monopoly power over food wrappings. By allegedly increasing the price of Cellophane to monopoly levels, du Pont caused competitors to supply, and consumers to buy, other wrapping materials. The government claimed that such supply and demand substitution did not prove that Cellophane would exhibit significant cross-price elasticity at a competitive price. See RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE 127-28 (1976).
200. Time Warner Entertainment Co. v. FCC, 105 F.3d 723, 724 n.2 (D.C. Cir. 1997) (Williams, J., dissenting from the denial of rehearing in banc).
201. For summaries of pending FCC spectrum auctions, see (visited Nov. 22, 1999).
202. See infra text accompanying notes 197, 218-221.
203. The following discussion directly responds to the FCC's request for "comment on the significance of the essential facilities standard under section 251(d)(2)." Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 21; see also id. ¶¶ 22-23. Of necessity, our discussion here treats in summary fashion a topic that merits lengthier analysis. For a thorough and up-to-date examination, see generally Lipsky & Sidak, supra note 4.
204. 708 F.2d 1081 (7th Cir. 1983).
205. Id. at 1132-33.
206. See AT&T Corp. v. Iowa Utils. Bd., 119 S. Ct. 721, 753 (1999) (Breyer, J., concurring in part and dissenting in part).
207. See id. at 734-35; id. at 753 (Breyer, J., concurring in part and dissenting in part).
208. See Lipsky & Sidak, supra note 4.
209. Iowa Utils. Bd., 119 S. Ct. at 753 (Breyer, J., concurring in part and dissenting in part).
210. See id. at 735 n.11; id. at 739 (Souter, J., concurring in part and dissenting in part); supra text accompanying note 76.
211. See Illinois ex rel. Hartigan v. Panhandle E. Pipe Line Co., 730 F. Supp. 826, 866 (C.D. Ill. 1990) (defining the concept of "derived demand"); United States v. Standard Oil Co., 155 F. Supp. 121, 146 (S.D.N.Y. 1957) ("The demand for ocean tankers is a derived demand reflecting changes in the demand for petroleum and its products. An increase in the demand for crude and its products would ordinarily bring an increased demand for ocean tankers and an increase in ocean tanker rates."). The former Interstate Commerce Commission employed such an analysis of demand and supply substitution in the 1980s when reforming rate-regulation principles for rail transportation supplied to "captive shippers." See Burlington N.R.R. v. ICC, 985 F.2d 589, 595-99 (D.C. Cir. 1993).
212. Those decisions are surveyed in Lipsky & Sidak, supra note 4, at 1191-93.
213. See Phillip E. Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 ANTITRUST L.J. 841 (1989) (arguing that no Supreme Court case has provided a consistent rationale for the doctrine or has explored either the social costs and benefits or the administrative costs of requiring the creator of an asset to share it with a rival); Donald I. Baker, Compulsory Access to Network Joint Ventures Under the Sherman Act: Rules or Roulette?, 1993 UTAH L. REV. 999 (arguing that the core conceptual problem with compulsory access orders is that mandating cooperation among businesses is futile); Lipsky & Sidak, supra note 4, at 1191-93.
214. See Phillip E. Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 ANTITRUST L.J. 841 (1989) (arguing that no Supreme Court case has provided a consistent rationale for the doctrine or has explored either the social costs and benefits or the administrative costs of requiring the creator of an asset to share it with a rival); Donald I. Baker, Compulsory Access to Network Joint Ventures Under the Sherman Act: Rules or Roulette?, 1993 UTAH L. REV. 999 (arguing that the core conceptual problem with compulsory access orders is that mandating cooperation among businesses is futile); Lipsky & Sidak, supra note 4, at 1191-93.
215. See Iowa Utils. Bd., 119 S. Ct. at 753-54 (Breyer, J., concurring in part and dissenting in part).
216. For proprietary network elements, the statutory requirement is conjunctive: "necessary . . . and . . . impair." 47 U.S.C.A. § 251(d)(2) (West Supp. 1999) (emphasis added).
217. Id.
218. Cf. Second Further Notice of Proposed Rulemaking, supra note 3 (separate statement of Commissioner Powell) ("I disagree sharply . . . that we should designate the same elements of the incumbent's network for unbundling of every region of the nation.").
219. See id. ¶ 14.
220. Id.
221. See, e.g., Memorandum Opinion and Order, Applications of NYNEX Corp., Transferor, and Bell Atlantic Corp., Transferee, for Consent to Transfer Control of NYNEX Corp. and Its Subsidiaries, 12 F.C.C.R. 19,985, ¶¶ 49-57 (1997).
222. See, e.g., J. Gregory Sidak & Daniel F. Spulber, Cyberjam: The Law and Economics of Internet Congestion of the Telephone Network, 21 HARV. J.L. & PUB. POL'Y 327, 336 (1998).
223. See, e.g., ROBERT W. CRANDALL & LEONARD WAVERMAN, TALK IS CHEAP: THE PROMISE OF REGULATORY REFORM IN NORTH AMERICA 80-85 (1995).
224. See Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 26.
225. Indeed, the definition and geographical scope of the LATAs took account
226. See Second Further Notice of Proposed Rulemaking, supra note 3 (separate statement of Commissioner Powell).
227. See INDUSTRY ANALYSIS DIV., FEDERAL COMMUNICATIONS COMM'N, REPORT - LOCAL COMPETITION 2 (1998).
228. See 1992 Horizontal Merger Guidelines, 57 Fed. Reg. 41,552, 41,554-58 (1992).
229. See, e.g., Memorandum Opinion and Order, Application of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., 13 F.C.C.R. 18,025, ¶¶ 37-39 (1998).
230. 1992 Horizontal Merger Guidelines, 57 Fed. Reg. at 41,556.
231. This approach is similar to that found in economics textbooks, see, e.g., CARLTON & PERLOFF, supra note 15, at 801-07, and in the legal literature, see, e.g., Landes & Posner, supra note 14.
232. See infra text accompanying notes 223-229.
233. See 5 MARSHALL, supra note 15, at 381-93.
234. STIGLER, supra note 16, at 252.
235. Marshall first derived those conditions for the two-factor case, given constant returns to scale. See LAYARD & WALTERS, supra note 15, at 259.
236. See Jennifer Files, AT&T Test-Markets Mobile Telephone as Alternative to Second Home Line, DALLAS MORNING NEWS, Nov. 12, 1998, available in 1998 WL 16348120.
237. For a discussion of an example of competition in the switching industry, see Susan Breidenbach, Switching Grows up: The Entire Report, NETWORK WORLD (May 4, 1998) .
238. See 1992 Horizontal Merger Guidelines, 57 Fed. Reg. 41,552, 41,556 (1992).
239. For recent examples of the use of the price discrimination approach of merger guidelines by the FTC in the petroleum market, see The Exxon-Mobile Merger: Hearings Before the Subcommittee on Energy and Power of the Committee on Commerce, House of Representatives, 106th Cong. 9-16 (1999) (statement of William J. Baer, Director, Bureau of Competition, Federal Trade Commission). For similar use of the Merger Guidelines with respect to the airline industry, see Comments of the Department of Justice, Joint Application of American Airlines, Inc. and British Airways PLC for Approval of and Antitrust Immunity for Alliance Agreement, No. OST-97-2058 (May 21, 1998), available in .
240. 1992 Horizontal Merger Guidelines, 57 Fed. Reg. at 41,556. For convenience, we will use the five percent level, although for some purposes a 10% level may be more appropriate.
241. Demand elasticities and supply elasticities have long been recognized in law and economics as important to assessing the possibility of the exercise of unilateral market power. See, e.g., Landes & Posner, supra note 14.
242. See 1992 Horizontal Merger Guidelines, 57 Fed. Reg. at 41,556. The other type of monopoly power recognized by the Merger Guidelines is coordinated interaction among all suppliers of a product. Such a possibility is not relevant here because competitors of an ILEC have very different cost structures and product offerings. Moreover, it is far-fetched to imagine firms such as AT&T and MCI WorldCom attempting to achieve coordination interactions with the RBOCs and GTE.
243. The own-price elasticity of demand is the percentage change in demand when the product's own price is raised by, say, 10%. The cross-price elasticity of demand is the percentage change in demand in response to the change in a competitor's price by, say, 10%. The two elasticity measures are related by the Slutsky equation in economic theory. The share-weighted (negative) own-price elasticity of demand equals the sum of the share-weighted cross-price elasticities of demand. See, e.g., HENDERSON & QUANDT, supra note 183, at 22-26.
244. For a more extensive discussion of critical share, see Jerry A. Hausman et al., Market Definition Under Price Discrimination, 64 ANTITRUST L.J. 367 (1996).
245. We have previously argued that the essential facilities doctrine identifies necessary, but not sufficient, conditions for mandatory unbundling at long-run incremental cost. See Hausman, supra note 168, at 22 ("Economic principles suggest that only the 'essential facility' elements of the network, which cannot be economically reproduced in the short run by new competitors, should be unbundled by regulation."); Paul W. MacAvoy & J. Gregory Sidak, What Is Wrong with American Telecommunications?, MULTIMEDIA UND RECHT, Mar. 1999, at 15, 15 ("Surely it is economic folly to mandate unbundling of any network element that is not 'essential' in the antitrust sense - that is, a network element that cannot be readily duplicated by the entrant or procured at competitive prices from the same vendors who supply the element to the incumbent firm subject to the unbundling obligation."); see also ROBERT W. CRANDALL, MANAGED COMPETITION IN U.S. TELECOMMUNICATIONS 17 (AEI-Brookings Joint Ctr. for Regulatory Studies Working Paper No. 99-1, 1999) ("[T]he decision to unbundle everything and to require its leasing at cost-based rates is wildly excessive."). For a similar conclusion by German scholars, applying American antitrust principles to German telecommunications law, see CHRISTOPH ENGEL & GÜNTER KNIEPS, DIE VORSCHRIFTEN DES TELEKOMMUNIKATIONSGESETZES ÜBER DEN ZUGANG ZU WESENTLICHEN LEISTUNGEN (1998); and Christoph Engel, Der Weg der Deutscher Telekommunikation in den Wettbewerb, MULTIMEDIA UND RECHT, Mar. 1999, at 7, 12-13. As noted earlier, Canada employs an essential facilities approach to mandatory unbundling. See supra text accompanying notes 174-175.
246. We have previously argued that the essential facilities doctrine identifies necessary, but not sufficient, conditions for mandatory unbundling at long-run incremental cost. See Hausman, supra note 168, at 22 ("Economic principles suggest that only the 'essential facility' elements of the network, which cannot be economically reproduced in the short run by new competitors, should be unbundled by regulation."); Paul W. MacAvoy & J. Gregory Sidak, What Is Wrong with American Telecommunications?, MULTIMEDIA UND RECHT, Mar. 1999, at 15, 15 ("Surely it is economic folly to mandate unbundling of any network element that is not 'essential' in the antitrust sense - that is, a network element that cannot be readily duplicated by the entrant or procured at competitive prices from the same vendors who supply the element to the incumbent firm subject to the unbundling obligation."); see also ROBERT W. CRANDALL, MANAGED COMPETITION IN U.S. TELECOMMUNICATIONS 17 (AEI-Brookings Joint Ctr. for Regulatory Studies Working Paper No. 99-1, 1999) ("[T]he decision to unbundle everything and to require its leasing at cost-based rates is wildly excessive."). For a similar conclusion by German scholars, applying American antitrust principles to German telecommunications law, see CHRISTOPH ENGEL & GÜNTER KNIEPS, DIE VORSCHRIFTEN DES TELEKOMMUNIKATIONSGESETZES ÜBER DEN ZUGANG ZU WESENTLICHEN LEISTUNGEN (1998); and Christoph Engel, Der Weg der Deutscher Telekommunikation in den Wettbewerb, MULTIMEDIA UND RECHT, Mar. 1999, at 7, 12-13. As noted earlier, Canada employs an essential facilities approach to mandatory unbundling. See supra text accompanying notes 174-175.
247. We have previously argued that the essential facilities doctrine identifies necessary, but not sufficient, conditions for mandatory unbundling at long-run incremental cost. See Hausman, supra note 168, at 22 ("Economic principles suggest that only the 'essential facility' elements of the network, which cannot be economically reproduced in the short run by new competitors, should be unbundled by regulation."); Paul W. MacAvoy & J. Gregory Sidak, What Is Wrong with American Telecommunications?, MULTIMEDIA UND RECHT, Mar. 1999, at 15, 15 ("Surely it is economic folly to mandate unbundling of any network element that is not 'essential' in the antitrust sense - that is, a network element that cannot be readily duplicated by the entrant or procured at competitive prices from the same vendors who supply the element to the incumbent firm subject to the unbundling obligation."); see also ROBERT W. CRANDALL, MANAGED COMPETITION IN U.S. TELECOMMUNICATIONS 17 (AEI-Brookings Joint Ctr. for Regulatory Studies Working Paper No. 99-1, 1999) ("[T]he decision to unbundle everything and to require its leasing at cost-based rates is wildly excessive."). For a similar conclusion by German scholars, applying American antitrust principles to German telecommunications law, see CHRISTOPH ENGEL & GÜNTER KNIEPS, DIE VORSCHRIFTEN DES TELEKOMMUNIKATIONSGESETZES ÜBER DEN ZUGANG ZU WESENTLICHEN LEISTUNGEN (1998); and Christoph Engel, Der Weg der Deutscher Telekommunikation in den Wettbewerb, MULTIMEDIA UND RECHT, Mar. 1999, at 7, 12-13. As noted earlier, Canada employs an essential facilities approach to mandatory unbundling. See supra text accompanying notes 174-175.
248. We have previously argued that the essential facilities doctrine identifies necessary, but not sufficient, conditions for mandatory unbundling at long-run incremental cost. See Hausman, supra note 168, at 22 ("Economic principles suggest that only the 'essential facility' elements of the network, which cannot be economically reproduced in the short run by new competitors, should be unbundled by regulation."); Paul W. MacAvoy & J. Gregory Sidak, What Is Wrong with American Telecommunications?, MULTIMEDIA UND RECHT, Mar. 1999, at 15, 15 ("Surely it is economic folly to mandate unbundling of any network element that is not 'essential' in the antitrust sense - that is, a network element that cannot be readily duplicated by the entrant or procured at competitive prices from the same vendors who supply the element to the incumbent firm subject to the unbundling obligation."); see also ROBERT W. CRANDALL, MANAGED COMPETITION IN U.S. TELECOMMUNICATIONS 17 (AEI-Brookings Joint Ctr. for Regulatory Studies Working Paper No. 99-1, 1999) ("[T]he decision to unbundle everything and to require its leasing at cost-based rates is wildly excessive."). For a similar conclusion by German scholars, applying American antitrust principles to German telecommunications law, see CHRISTOPH ENGEL & GÜNTER KNIEPS, DIE VORSCHRIFTEN DES TELEKOMMUNIKATIONSGESETZES ÜBER DEN ZUGANG ZU WESENTLICHEN LEISTUNGEN (1998); and Christoph Engel, Der Weg der Deutscher Telekommunikation in den Wettbewerb, MULTIMEDIA UND RECHT, Mar. 1999, at 7, 12-13. As noted earlier, Canada employs an essential facilities approach to mandatory unbundling. See supra text accompanying notes 174-175.
249. We focus here on the "impairment" standard. As we shall explain presently, our understanding of the "necessary" standard is that it would raise the bar of our five-part test in cases where the desired element embodied some type of intellectual property to which the ILEC had a legally recognizable form of protection.
250. n), then the ILEC could not exercise market power.
251. Landes & Posner, supra note 14, at 975-76.
252. Id. at 976.
253. Metro Mobile CTS v. NewVector Communications, 892 F.2d 62, 63 (9th Cir. 1989) (citations omitted); accord Consolidated Gas Co. v. City Gas Co., 880 F.2d 297, 300 (11th Cir. 1989), aff'd on reh'g, 912 F.2d 1262 (11th Cir. 1990), rev'd per curiam on other grounds, 499 U.S. 915 (1991).
254. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 37.
255. It has long been recognized in the economics literature that the private incentive to innovate is too low relative to the socially optimal outcome that maximizes consumer welfare even when a patent is granted. See, e.g., JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION 389-414 (1988). The FCC will further decrease the already insufficient incentive to innovate if it requires mandatory unbundling of elements based on intellectual property and requires them to be sold at TELRIC-based prices.
256. See Antitrust Guidelines for the Licensing of Intellectual Property, 4 Trade Reg. Rep. (CCH) ¶ 13,132, at 20,734 & n.1 (Apr. 11, 1995). The Guidelines state: "The intellectual property laws and the antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare." Id. at 20,734.
257. First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, ¶ 282 (1996).
258. 10 OXFORD ENGLISH DICTIONARY 276 (2d ed. 1989).
259. WEBSTER'S II NEW RIVERSIDE UNIVERSITY DICTIONARY 787 (1988).
260. First Report and Order, 11 F.C.C.R. ¶ 282.
261. See, e.g., David J. Teece & Mary Coleman, The Meaning of Monopoly: Antitrust Analysis in High-Technology Industries, 43 ANTITRUST BULL. 801, 820-22 (1998) (discussing entrepreneurial rents derived from innovation).
262. The following analysis responds to the FCC's request for "comment on when we should deem a substitute sufficiently available so as to render access to the incumbent's network element unnecessary." Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 21; see also id. ¶ 24 (asking "how the Commission should consider the availability of network elements outside of the incumbent's network").
263. Indeed, marginal costs are either constant or decreasing for most UNEs. Otherwise, we would expect to see numerous small competitors entering the market to supply UNEs.
264. See AT&T Corp. v. Iowa Utils. Bd., 119 S. Ct. 721, 735 (1999).
265. It is well recognized that a barrier to exit becomes a barrier to entry. For a discussion of the absence of exit barriers in the wireless industry because fixed investment is amenable to redeployment by other firms or in other geographic markets, see SIDAK & SPULBER, supra note 4, at 78-79.
266. To a limited extent, the Commission recognized this notion of cost in its 1996 interconnection proceeding. See First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499, ¶¶ 638-52, 686-95 (1996) (discussing testimony of Jerry Hausman). For further discussion, see Hausman, supra note 168, at 24-26; Hausman, supra note 12, at 26-35.
267. See supra text accompanying notes 184-185.
268. See REGIS J. BATES & DONALD GREGORY, VOICE AND DATA COMMUNICATIONS HANDBOOK 31 (1998).
269. See Peter W. Huber & Evan T. Leo, UNE Fact Report, FCC 96-98 (May 26, 1999) (submitted by United States Telephone Association and prepared for Ameritech, Bell Atlantic, BellSouth, GTE, and U S WEST) (on file with The Yale Law Journal).
270. See Peter W. Huber & Evan T. Leo, UNE Fact Report, FCC 96-98 (May 26, 1999) (submitted by United States Telephone Association and prepared for Ameritech, Bell Atlantic, BellSouth, GTE, and U S WEST) (on file with The Yale Law Journal).
271. See Petition of AT&T Corp. To Deny Application, GTE Corp. & Bell Atlantic Corp. for Consent to Transfer of Control, FCC 98-184, at 24 (Nov. 23, 1998) (on file with The Yale Law Journal).
272. This section addresses only supply-side effects. With respect to demand-side constraints on market power, as soon as AT&T begins to supply cable telephony, unbundled loops should no longer meet the impairment test. At that time, an ILEC should no longer be compelled to supply CLECs unbundled loops at a TELRIC price.
273. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 32.
274. See Order Granting Petition, Petition of U S WEST Communications, Inc. for Competitive Classification of its Directory Assistance Services, Dkt. UT-990259 (Wash. Utils. & Transp. Comm'n Apr. 29, 1999), available in 1999 Wash. UTC LEXIS 346.
275. Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, 14 F.C.C.R. 2398, ¶ 12 (1999).
276. Id. ¶ 13 (footnote omitted).
277. Id. ¶ 36.
278. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 32; see also id. ¶ 34 (seeking comment on whether to "modify the definition of 'loops' or 'transport' to include dark fiber"); id. ¶ 35 (seeking comment on mandatory unbundling of DSLAMs and packet switches).
279. Id. ¶ 2.
280. See, e.g., STIGLER, supra note 16, at 24.
281. See Alex Best, Senior Vice President, Engineering, Cox Communications, Presentation at 1999 Fifth Annual Goldman Sachs Communications Technology Retreat (Mar. 1, 1999) (on file with The Yale Law Journal).
282. See Paul Farhi, AT&T: Too Big Once Again?, WASH. POST, Apr. 27, 1999, at E1. AT&T would pass a much higher percentage of homes.
283. See Rebecca Blumenstein, AT&T Plans To Enter Some Areas Using "Fixed Wireless" Technology, WALL ST. J., Mar. 19, 1999, at B6.
284. See Joe Gardyasz, Phone Co-Op Pulls Plug on Wireless Competitor, BISMARCK TRIB., Jan. 13, 1999, at 5.
285. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 14.
286. See id. ¶ 28 (asking "whether and the extent to which the language of the statute and the Supreme Court's opinion constrain the factors that we can or should consider in evaluating the availability of elements outside the incumbent's network").
287. SIDAK & SPULBER, supra note 4, at 425.
288. See Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 42 ("[W]e seek comment on whether the existence of a competitive market for a network element is necessary to demonstrate that an element is sufficiently available outside the incumbent's network so that failure of the incumbent to provide the element would not be 'necessary' or would not 'impair' a carrier's ability to provide service.").
289. See Laura M. Holson & Seth Schiesel, MCI To Buy Sprint in Swap of Stock for $108 Billion, N.Y. TIMES, Oct. 5, 1999, at A1.
290. See Hausman, supra note 168, at 24-26; see also SIDAK & SPULBER, supra note 4, at 421 (discussing the Hatfield model).
291. In early 1999, the FCC stated: "Our role is not to pick winners and losers, or to select the best technology to meet consumer demand. We intend to rely as much as possible on free markets and private enterprise." Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, 14 F.C.C.R. 2398, ¶ 5 (1999).
292. Telecommunications Act of 1996, Pub. L. No. 104-104, pmbl., 110 Stat. 56, 56.
293. See Richard D. Friedman, Economic Analysis of Evidentiary Law: An Underused Tool, an Underplowed Field, 19 CARDOZO L. REV. 1531, 1533 (1998); Bruce L. Hay, Allocating the Burden of Proof, 12 IND. L.J. 651 (1997); Jason S. Johnston, Bayesian Fact-Finding and Efficiency: Toward an Economic Theory of Liability Under Uncertainty, 61 S. CAL. L. REV. 137 (1987); Richard A. Posner, An Economic Approach to the Law of Evidence, 51 STAN. L. REV. 1477 (1999); Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399, 410 (1973).
294. See Richard D. Friedman, Economic Analysis of Evidentiary Law: An Underused Tool, an Underplowed Field, 19 CARDOZO L. REV. 1531, 1533 (1998); Bruce L. Hay, Allocating the Burden of Proof, 12 IND. L.J. 651 (1997); Jason S. Johnston, Bayesian Fact-Finding and Efficiency: Toward an Economic Theory of Liability Under Uncertainty, 61 S. CAL. L. REV. 137 (1987); Richard A. Posner, An Economic Approach to the Law of Evidence, 51 STAN. L. REV. 1477 (1999); Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399, 410 (1973).
295. See Richard D. Friedman, Economic Analysis of Evidentiary Law: An Underused Tool, an Underplowed Field, 19 CARDOZO L. REV. 1531, 1533 (1998); Bruce L. Hay, Allocating the Burden of Proof, 12 IND. L.J. 651 (1997); Jason S. Johnston, Bayesian Fact-Finding and Efficiency: Toward an Economic Theory of Liability Under Uncertainty, 61 S. CAL. L. REV. 137 (1987); Richard A. Posner, An Economic Approach to the Law of Evidence, 51 STAN. L. REV. 1477 (1999); Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399, 410 (1973).
296. See Richard D. Friedman, Economic Analysis of Evidentiary Law: An Underused Tool, an Underplowed Field, 19 CARDOZO L. REV. 1531, 1533 (1998); Bruce L. Hay, Allocating the Burden of Proof, 12 IND. L.J. 651 (1997); Jason S. Johnston, Bayesian Fact-Finding and Efficiency: Toward an Economic Theory of Liability Under Uncertainty, 61 S. CAL. L. REV. 137 (1987); Richard A. Posner, An Economic Approach to the Law of Evidence, 51 STAN. L. REV. 1477 (1999); Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399, 410 (1973).
297. See Richard D. Friedman, Economic Analysis of Evidentiary Law: An Underused Tool, an Underplowed Field, 19 CARDOZO L. REV. 1531, 1533 (1998); Bruce L. Hay, Allocating the Burden of Proof, 12 IND. L.J. 651 (1997); Jason S. Johnston, Bayesian Fact-Finding and Efficiency: Toward an Economic Theory of Liability Under Uncertainty, 61 S. CAL. L. REV. 137 (1987); Richard A. Posner, An Economic Approach to the Law of Evidence, 51 STAN. L. REV. 1477 (1999); Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399, 410 (1973).
298. See Apartment Source, L.P. v. Philadelphia Newspapers, No. 98-5472, 1999 WL 191649, at *7-*8 (E.D. Pa. Apr. 1, 1999).
299. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 11; see also id. ¶ 36 ("[W]hether the Commission should adopt a mechanism by which network elements would no longer have to be unbundled at a future date."); id. ("[W]hether affirmative steps by the parties or the Commission should be necessary to remove a particular element from unbundling requirements, or whether affirmative action should be necessary to continue requiring the unbundling of particular elements.").
300. Id. ¶ 39.
301. Id. ¶ 12.
302. Id. ¶ 14.
303. Id. ¶ 12.
304. INDUSTRY ANALYSIS DIV., supra note 212, at 3.
305. See generally Friedrich A. Hayek, The Use of Knowledge in Society, 35 AM. ECON. REV. 519 (1945).
306. Cf. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 36 (discussing "whether the Commission should adopt a mechanism by which network elements would no longer have to be unbundled at a future date").
307. See 47 U.S.C.A. § 252(b) (West Supp. 1999).
308. See id. § 271(c)(1)(A) (describing the requirements for state approval of the RBOC's generic interconnection plan); id. § 271(c)(1)(B) (setting forth alternative procedures if no requests for interconnection are forthcoming); id. § 272(b) (providing a competitive checklist).
309. See Sidak & Spulber, supra note 4, at 1082-83.
310. Second Further Notice of Proposed Rulemaking, supra note 3, ¶ 14.
311. Id. ¶ 38.
312. AT&T v. Iowa Utils. Bd., 119 S. Ct. 721, 736 (1999).
313. Telecommunications Act of 1996, Pub. L. No. 104-104, pmbl., 110 Stat. 56, 56.
314. Id.