Strategic Behaviour in Network Industries

Strategic Behaviour in Network Industries

A Multidisciplinary Approach

Ernst ten Heuvelhof, Martin de Jong, Mirjam Kars and Helen Stout

This in-depth book explains how institutional changes such as the privatization and liberalization of network industries, for example transport, energy or telecommunications, can frequently be disappointing. The expected benefits such as lower prices, innovation and better services fail to materialize, often because the number of competitors is low. The authors demonstrate how strategic actor behaviour of one or more of the firms involved can help explain these disappointing results.

Chapter 7: American Telephone and Telegraph Company

Ernst ten Heuvelhof, Martin de Jong, Mirjam Kars and Helen Stout

Subjects: business and management, organisational behaviour, economics and finance, game theory, institutional economics, public sector economics


BACKGROUND: THE BELL SYSTEM Since its foundation in 1885, the American Telephone and Telegraph Company (AT&T Corporation) had been owned by the American Bell Telephone Company, also called Bell System. Right from the start, AT&T had been an active player. It tried to strengthen its market position particularly by taking over smaller independent telephone companies. Other links in the chain also attracted AT&T’s interest. An important takeover was that of Western Electric Manufacturing Company by Bell System in 1882. Western Electric manufactured telegraph and telephone equipment and components.1 The takeover of Western Electric brought AT&T an important trump card, which it managed to play smartly. AT&T forbade its subscribers to use their own equipment. Instead, they were forced to rent telephones and, if necessary, other peripherals from AT&T, which, in turn, only offered products manufactured by Western Electric. Many phones made by Western Electric carried the following disclaimer permanently moulded into their housings: ‘Bell System property. Not for sale’. Telephones were also labelled with a sticker marking the Bell Operating Company that owned the telephone. AT&T leased out the phones at a fixed rate per month. In this way, AT&T collected an amount in rent many times higher than the production costs, while the advantage for AT&T increased the longer the rental agreement lasted. The prohibition to use phones of producers other than Western Electric had to be taken seriously. AT&T had inspectors monitor compliance with the prohibition by checking...

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