Introduction

In this chapter we will apply efficient pricing theory to policy questions relying heavily on a special, but important, case study: the market for message service on AT&T's public switched network. The particular interest of using this market is that the relative merits of FDC pricing, Ramsey pricing, and nonuniform pricing in this market were vigorously debated for years, with few clearcut results. Although our analysis will probably raise more questions than it settles, it will bring a useful perspective to that debate.

For some years, AT&T and the Federal Communications Commission (FCC) debated the rationale for offering Wide Area Telephone Service (WATS) as a service distinct from ordinary Message Toll Service (MTS); the latter is sold under a predominately uniform price tariff and the former under a tariff displaying quantity discounts. AT&T argued that WATS is fundamentally a different service from MTS, so that it can be offered under a different tariff. The FCC took the view that WATS and MTS had so much in common that they should be regarded as the same service in all functional aspects and that any tariff differences between the two should be due only to cost differences. The FCC argued that, absent such cost differences, the existence of WATS as a separate service with a bulk discount tariff constituted price discrimination against small users, who bought on the MTS tariff, which has a higher usage charge.