The Regulatory Inefficiency Theorem

by Mr Juggles

When the Justice Dept won its antitrust case against AT&T, the company was split into multiple local operating companies. AT&T focused on the long distance market. Now, those companies have recombined to the point where only three remain: Verizon, AT&T, and Qwest. Essentially, the old AT&T has been reformed in three geographic regions. Why is this? Because of the Regulatory Inefficiency Theorem.

The Regulatory Inefficiency Theorem states that any move by a regulator will thereafter be reversed by the market. The time to reversal will vary inversely with the amount of regulatory oversight implemented whereas the lobbying dollars spent will vary directly.

In the case of telecom — an industry with large returns to scale — there is more regulatory oversight than almost any other industry. And, as our RIT model predicts, we observe a near complete reversal of the regulator’s actions over time combined with immense lobbying efforts. In fact, according the Post, the telecom industry spends more on lobbying “than the tobacco, aerospace and gambling lobbies combined.”

Click through for whole chartAT&T


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