Friday, June 22, 2012
The Roots of Monopoly Power and Universal Service and the Limits of Government Ownership: Insights from the OFT Overlooked Nationalization of the U.S. Telephone System During World War I
Posted by D. Daniel Sokol
Christopher S. Yoo, University of Pennsylvania Law School, University of Pennsylvania - Annenberg School for Communication and Michael Janson, explore The Roots of Monopoly Power and Universal Service and the Limits of Government Ownership: Insights from the OFT Overlooked Nationalization of the U.S. Telephone System During World War I.
ABSTRACT: One of the most distinctive characteristics of the U.S. telephone system is that it eschewed the government-owned PTT model in favor of one in which the telephone system is privately owned. According to the conventional wisdom, private ownership permitted AT&T President Theodore Vail to stifle the emergence competition in local telephone service by acquiring rival services, notwithstanding the half-hearted attempts by the federal government to use the antitrust laws to prevent him from doing so reflected in the Kingsbury Commitment.
What is not widely known is how close the U.S. came to falling in line with the rest of the world. For the one-year period following July 31, 1918, the federal government took over the U.S. telephone system, using the exigency of World War I to accede to the Postmaster General’s desire to assert control over it. The episode sheds new light on the role of scale economies and network economic effects that were understood far earlier than generally believed. Even more importantly, the history reveals that the Kingsbury Commitment was more effective in deterring monopoly than generally believed and that the primary force driving the re-monopolization of the telephone system was the Postmaster General, not Theodore Vail. It also reveals that, contrary to the claims of subsequent commentators, universal service implemented through cross subsidies did play a key role in telecommunications as early as 1918. The most remarkable question is, having once obtained control over the telephone system, why the federal government ever let it go. The dynamics surrounding this decision reveals the inherent limits of relying on war to justify extraordinary actions. More importantly, it shows the difficulties that governments face in overseeing industries that are undergoing dynamic technological change and that require significant investments of risk capital.