Remedies and Regulation in Network Industries

Lawyers and economists attach different meanings to the word “remedy,” and that difference has profound consequences for competition policy in network industries. In law, a remedy is ordinarily retrospective, imposed only after liability has been found; in economics, a remedy addresses market failure and therefore can be imposed prospectively, before any adjudication of unlawful conduct. In this article, originally presented in 2002 and republished here in its original form, I examine how that distinction illuminated the choice among ex post antitrust enforcement, ex ante sector-specific regulation, and the hybrid institution of the consent decree in telecommunications, software, and other industries characterized by sunk costs, intellectual property, and network effects. The American experience with total element long-run incremental cost (TELRIC) pricing and mandatory unbundling under the Telecommunications Act of 1996 showed how a remedy designed ostensibly to promote consumer welfare could become a mechanism for protecting competitors and transferring quasi rents. That experience also suggested that regulatory pricing concepts might migrate into antitrust remedies for product integration and tying cases, including those involving software. Courts and enforcement agencies therefore need to exercise caution before importing ex ante regulatory remedies into antitrust law, lest the law punish efficient integration and investment rather than correct genuine market failure.