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A new study investigates the effects of deregulation on strategic choices in the telecommunications industry.

The result of the antitrust case against AT&T which barred the regional Bell operating companies operating as integrated providers in adjacent markets is truly exceptional. The decision was based on monopolization theories which claim that vertical integration would facilitate cross-subsidization and that it would provide incentives allowing for anti-competitive discrimination favorable to its own service. An examination of the performance of a vertically integrated, multiple local exchange carrier present empirical evidence which do not support the theory.

The removal of the Modification of Final Judgment (MFJ) restrictions on the regional Bell operating companies (RBOCs) in the manufacture of equipment for telecommunications would benefit consumers. Deregulation would likely result in new and improved products as well as a more efficient methods of production. The RBOCs' technical knowledge and skill, acquaintance with consumer needs and financial resources are the sources for such consumer benefits. Highly effective regulations that can detect anticompetitive and inefficient behavior have already been developed to prevent such actions so these would not likely occur and offset the benefits.

Development in technology and consumer demands have made realignment, specifically vertical integration, among the firms in the telecommunications industry a winning strategy. Vertically integrated companies producing bundled telecommunications packages demanded by consumers have the edge over disintegrated companies that offer piecemeal parts, which the consumers have to assemble and control themselves. The stockmarket reaction to merger announcements is quite positive as shown by the AT&T-McCaw. The regional Bell operating companies, on the other hand, had shown negative price declines.

Consumers will benefit substantially if the Modification of Final Judgment (MFJ) will release the regional Bell operating companies (RBOCs) from the interexchange services restrictions effected at the time of the AT&T 1984 divestiture. Within the decade after the divestment, state and federal regulations were developed to safeguard anticompetitive actions in the interexchange market. At present, the unregulated market shows no such behavior among the telephone companies. In fact, the release of the RBOCs from the restrictions will foster competitiveness.

Technological changes since the Modification of Final Judgment took effect in 1984 have altered the nature of telecommunications network. These have eliminated the distinction between the local exchange and interexchange services. Because of this, vertical integration results in a more efficient competition in the telephone industry. It would therefore greatly benefit the consumers if the line-of-business restrictions were to be lifted.

The Modification of Final Judgment (MJF) was promulgated to introduce and maintain competition in several markets of telecommunication where regulations through competition would be tenable. This was based on the belief that a divestiture and restriction policy was the only way for competition to grow. At the time of its inception, the MFJ was the best alternative. It answered the problem of cutting through the FCC barriers, but it did not, still is and will not be able to solve the cross-subsidy problem as regulation will always lag behind technological and market boundaries.