Regulation in the United States

What was the aim of the telephone monopolies in Europe? Not customer satisfaction—for State monopolies such considerations were entirely alien. Their main concern was to provide jobs for the boys in their own countries. Buying telecommunications equipment in another country was a rarity.

In the US the situation was more complicated owing to AT&T's near-monopoly. Although their market share declined after the expiry of the Bell patents, they bounced back later by aggressive policies.

The wish to regulate AT&T started around the turn of the century, mainly in the southern states which wanted to encourage business

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expansion by ensuring low telecommunications rates. By 1914 thirty-four states and the District of Columbia had some kind of regulation. One of the problems that arose, one in which the anti-trust authorities also took an interest, was the denial of access to essential facilities by a monopolist. An example was a railway dispute in 1912. The complaint was that the bridges across the Mississippi were controlled by a few companies which denied access to their competitors. The US Supreme Court ruled that this was an unlawful restraint on trade. The implications for telecommunications were clear. Indeed, the US Department of Justice filed an anti-trust suit against AT&T which was settled out of court in 1913. AT&T undertook to interconnect with other companies for long-distance calls and to refrain from buying up competing telephone companies. After 1921 (when regulation passed on from anti-trust authorities to the Interstate Commerce Commission) AT&T returned to its predatory practices. By 1934 it owned 80 per cent of all the telephones and had full monopoly in all the long-distance services.

In order to remedy the situation the Communications Act of 1934 was passed, which set up the Federal Communications Commission. It was their job to protect the independents and to watch out for unfair practices. On the whole however they did little because they were believers in natural monopoly theory, which maintained that a monopolist could supply the market output at a lower cost than any combination of competing firms. This was largely a matter of belief because it would have been rather difficult to test the theory in the field. A monopoly was certainly the preferred choice of the Defense Department. They loathed the idea of having to negotiate with a set of companies. A monopoly also made good sense from the customer's point of view. If subscriber A from city X wanted to call subscriber B from city Y, then he wanted a single company to assume responsibility for the success or failure of the call. Who would want to write seven complaining letters and who would want to hear the reply of the companies that any failure on the line was the fault of the other six companies?

In the 1930s the ideal solution appeared to be to acquiesce in AT&T's monopoly but to regulate their activities. How that view was slowly corroded will be the subject of Chapter 13.

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