Reforming FCC Regulation of Dominant Telephone Carriers: Putting Some Teeth into the Test for Predation

This Note examines the ineffective protections against predatory pricing by AT&T contained in the price cap scheme. Part I outlines price cap regulation and explains how the FCC hopes that a test based on the average variable cost standard will detect predatory pricing. Part II argues that the FCC erred in adopting an average variable cost standard as the test for telecommunications predation because that standard ignores the high fixed costs common to all firms in the industry. Part II demonstrates that AT&T could engage in predatory pricing despite the protections contained in the regulatory scheme. Part II then examines the rationale given by the FCC for adopting a test based on the average variable cost standard and demonstrates its inadequacy. Finally, Part III examines two tests for predation that consider fixed costs and suggests that replacing the average variable cost standard with a test based on long-run marginal cost would provide more effective protection against predatory activity by AT&T in the telecommunications industry.