Opportunities vs incentives to discriminate in the US telecommunications industry

In an industry where vertically integrated firms are allowed to compete with rivals in the downstream market, policy makers are naturally concerned with the risk of discrimination and anti-competitive behavior. This paper argues to the contrary, that in the current environment, the vertically integrated Regional Bell Operating Companies (RBOCs) have no incentive to discriminate against their downstream competitors, the inter-exchange carriers (IXCs). In fact, they may have economic incentives to reduce rather than raise the costs of their rivals. They may also prefer more competitors in the long distance market to fewer. Furthermore, should the regulatory authority impose more stringent profit-sharing constraints on the RBOCs in the exchange excess market and delay RBOC entry into the long distance market, this will only exacerbate the risk of discrimination and reduce consumers' surplus.