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.
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(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)