Question: Lord of the Rings

Competition in communications seems cutthroat. Companies are invading each other's turf, and prices are falling. You can make a video-phone call to Australia via the Internet, chat for three hours, and never pay a penny. Citing all this hubbub, AT&T Inc. argues that there's no threat of remonopolization even as it bids to reunite five of the eight companies that emerged from the 1984 breakup of the Bell System. Look out, though. The competition we're seeing is just a phase, and an unstable one at that. The key thing about communications networks is that they're very costly to build, but once they're built, it's cheap to add customers to them. This industry structure has special economic properties. At times it produces price wars. At other times it leads to merger waves, resulting in a small number of competitors with the ability to raise prices and garner big profits.

In this delicate situation, [communications companies] have used two main strategies over the years. One has been to cut prices to fill up their networks. Remember, additional customers are cheap to serve, so there's room to cut. The alternative strategy, which [the CEO of AT&T] and others have also pursued, is consolidation. As long as regulators permit, the strong buy the weak and extinguish the excess capacity. As competition eases, the survivors can raise prices and restore their profitability. (Good for shareholders; bad for customers.)

Examining the Newsclip Question

1. Summarizing What two strategies has AT&T used in recent years to gain new business, and why?

2. Determining Cause and Effect How does lack of competition increase prices for the consumer?