Volume 73, Number 4

October 1998

Does the Constitution Require that We Kill the Competitive Goose? Pricing Local Phone Services to Rivals

William J. Baumol, Thomas W. Merrill

This Article concludes a series by these authors and Professors J. Gregory Sidak and Daniel F. Spulber, published last year in this journal. Here, Professors Baumol and Merrill address the issues surrounding the pricing of local phone services to long distance rivals, clarifying their points of agreement and disagreement with Sidak and Spulber. In their previous articles, Sidak and Spulber argued that the movement toward competition in local telephone service should be accompanied by substantial compensation to existing local telephone carriers, a view that Baumol and Merrill do not share. Rather, they note three points of disagreement between Sidak and Spulber and themselves. First, they maintain that Sidak and Spulber use an incorrect formula to determine whether the transition from regulated monopoly to competition requires compensation. Second, they argue that neither the Compensation Clause nor the regulatory contract requires compensation to take place ex ante. Finally, they do not believe that the magnitude of fixed and common costs will be significant in local telephony.