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Working Paper

Divestiture and the Separate Subsidiary Requirement

Florence Setzer.  

OSP Working Paper 11 (Mar 1984) examines two major legal and regulatory changes that were imposed, the first by the FCC and the second in settlement of an antitrust suit against AT&T.  In 1980 the FCC, in its Second Computer Inquiry (Computer II), allowed AT&T to enter competitive industries on an unregulated basis but required it to do so through completely separate subsidiaries.  Then in 1982, the Department of Justice and AT&T entered into a new consent decree, incorporated in the Modified Final Judgment (MFJ), which required divestiture of the local Bell operating companies (BOC’s) from AT&T. 

This MFJ decision separated AT&T’s interexchange telephone service and equipment-manufacturing functions, both at least potentially competitive, from monopoly local telephone service, and in effect replaced the earlier decree.  Divestiture of the BOC’s under the MFJ occurred on January 1, 1984 and the Computer II separate subsidiary requirements were left in place for AT&T.

Setzer examines the rationale for the separate subsidiary requirement in the light of the far-reaching structural changes in the telephone system mandated by the MFJ.  She argues that, if divestiture of the BOC’s is sufficient to prevent competitive abuses of monopoly power -- particularly in the provision of equipment and interexchange telephone service -- then the Computer II separate subsidiary requirement may be unnecessary and may impose costs in the provision of telephone service not balanced by any benefit.

Issued: March 1984
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