Solveig Bernstein*

First Pacific Telesis and Southwesterm Bell merged, the first merger of two Baby Bells since Ma Bell was broken up in 1984. Then Bell Atlantic and Nynex announced plans to merge, and are now waiting the completion of regulatory review. The question whether each deal will be good or bad for competition has drawn the attention of would-be telecom seers everywhere, including state regulators, the Federal Communications Commission (FCC), activists, and the Department of Justice (DOJ). If opponents of the mergers persuade any entity to interfere with the mergers, it will probably be DOJ, since the FCC is busy with a plethora of rulemakings.

But the Telecommunications Act of 1996, which terminated the antitrust consent decree under which DOJ had overseen the Bells' affairs, as well as decrees binding AT&T and GTE, signalled the judgement that consumers are better off when regulators, including DOJ, are not perpetually scrutinizing the industry pursuant to a plethora of decrees. DOJ's scrutiny of the proposed Bell mergers raises the prospect of a series of new decrees.

It is this prospect of new bars to change in telecommunications markets, not the mergers themselves, that should worry us. We shouldn't confuse the survival of the process of competition with the survival of individual competitors. In real-world competition, businesses form, fail, merge, or thrive in ever-changing variety. It shouldn't alarm us when we see this happening in telecommunications markets.

Clearly, the proposed mergers do alarm some, at least. But the alarm reveals more about the expectations of the alarmed observers than about the mergers themselves. Too many observers expect competition to look like the "perfect" competition of academic models, where many firms compete tidily on perfectly equal terms in endless stable equilibrium. This simply cannot be. If we expect it to be, we will always be disappointed.

Another set of mistaken expectations arises from the history of telecommunications markets. For years, federal and state authorities were deeply entangled with the phone companies' day-to-day business decisions. Rates were regulated. Service was regulated. Entry into and even exit from the business was regulated. State-supported monopoly was the order of the day. If we expect deregulated telecommunications markets to proceed like the orderly, politically cautious monopolies of yesteryear, we will again be sadly disappointed.

The temptation to call on the regulators as guarantors of "fair" or "pure" or "genuine" competition will be strong. Years of layered regulation can only mean one thing; the telecommunications market today is massively distorted. On a grander scale, years of economic regulation in the former Soviet Union yielded a surreal mosaic of outmoded industries, overemployment, bizarre shortages, and distribution by queue. Perhaps the distortion of telecommunications markets is less extreme, but, rest assured, it's there.

This distortion will become more and more apparent now that telecommunications markets are being deregulated. As the market readjusts itself, there will be price increases, price decreases, bundling, mergers, layoffs, hirings, new firms, new services, and even bankruptcies and divestitures, at a dazzling pace. Many of these changes will be entrepreneurs' natural adaptations to an ever-changing world. But some of the changes, indistinguishable in practice from the other kind, represent the market's frantic attempt to coordinate itself after years of regulation. Eventually, perhaps, the market will calm down.

And that's the way it has to be. There is no short cut to coordinated markets. If there were, they'd be gratefully employing it in the former Soviet Union.

The tragic error would be to translate our idealistic views of what competition "should" look like into endless activities designed to manipulate, tweak, and improve upon competition in today's telecommunications markets. This is not to say that deregulated markets function perfectly. It is only to say that regulatory micro-management of competition or anything else, however well-intentioned, has proven itself even more imperfect. We do not need more of the same.

* Solveig Bernstein is Assistant Director of Telecommunications & Technology Studies at the Cato Institute.