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The Breakup of AT&T

In 1982, AT&T and the Department of Justice settled the antitrust case against AT&T. AT&T agreed to break itself up into several firms in 1984. One firm, AT&T, provided long-distance service, and seven other firms ("Baby Bells") provided local telephone service in different regions. The Department of Justice apparently felt that a vertically integrated telephone company, one that provided local and long-distance service, was not required for productive efficiency, or that there were other offsetting gains from the divestiture.

According to the Department of Justice, the vertical structure of the company provided an opportunity for unfair competition against other providers of long-distance service. For example, by charging high local rates or by providing poor local service to other providers of long-distance service (which require local service), AT&T could harm long-distance competitors. Another concern of the Department of Justice was the difficulty of monitoring cost-shifting among AT&T's regulated (telephone) and other relatively unregulated businesses (such as the manufacture of telephones and other equipment). The resulting breakup of the telephone company presumably mitigated the government's concerns.

Since 1984, the technology and industry structure have changed rapidly. By 2000, there are likely to be only four local phone companies from the Baby Bells remaining, as a result of mergers among the original seven firms. Moreover, there are now several national long-distance carriers that also provide local service.


Lavey and Carlton (1983). See also Noll and Owen (1994).

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