FTC Staff Comment Before the Federal Communications Commission In the Matter of Bundling of Cellular Customer Premises Equipment and Cellular Services

V910016
COMMISSION AUTHORIZEO
BEFORE THE
FEDERAL COMMUNICATIONS 	COMMISSION
WASHINGTON, 	D. 	C. 	20554
In The Matter of
Bundling of Cellular Customer
Premises Equipment and
Cellular Service
)
)
)
)
)
CC Docket No. 	91-34
Comment of 	the Staff of
the 	Bureau of Economics 	•
of 	the 	Federal 	Trade Commission
July 	31, 	1991
• This comment represents the views of the staff of the Bureau
of 	Economics 	of 	the 	Federal 	Trade 	Commission. 	They 	are 	not
necessarily 	the 	views 	of 	the 	Commission 	or 	any 	individual
Commissioner. 	Inquiries regarding this comment should be directed
to 	Bruce 	H. 	Kobayashi 	(202-326-3363) 	of 	the 	FTC's 	Bureau 	of
Economics.

Executive 	Summary 	.
Table of Contents
• 	• 	• 	• 	iii
I. 	Introduction 	. 	1
II. 	Expertise 	of 	the 	Staff 	of 	the 	Federal 	Trade 	Commission. 	3
III. 	Background 	of 	and 	Issues 	Contained 	in 	the NPRM 	. 	4
IV. 	An Analysis 	of 	Bundling 	• 	• 	• 	• 	. 	. 	• 	. 	. 	. 	. 	. 	. 	. 	•. 	7
A. 	Market 	power 	in 	the 	provision 	of 	CPE 	and 	Cellular
Service 	. 	. 	. 	. 	. 	. 	. 	.. 	8
1. 	The 	Structure 	of 	the 	Cellular Service
Industry 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	.. 	10
2. 	Competition between Resellers 	and 	Facilities-
B.
Based 	Carriers 	• 	. 	• 	• 	. 	. 	• 	. 	• 	• 	• 	. 	. 	. 	.
Economic 	Reasons 	for 	Bundling 	. 	. 	. 	. 	. 	. 	• 	. 	. 	.
1. 	Bundling and 	Efficient 	Packaging 	. 	. 	. 	. 	. 	.
2. 	Bundling as 	an 	Efficient 	Promotional 	Device
3. 	Bundling and 	Foreclosure 	of 	the 	CPE 	market.
4. 	Price 	Discrimination 	••..........
5. 	Cross 	Subsidy with 	Rate-of-Return 	Regulation
12
16
17
17
21
26
29
V. 	Concluding Remarks 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	• 	• 	. 	. 	. 	• 	. 	30
ii

Executive Summary
The 	staff 	of 	the 	Federal 	Trade 	Commission 	submits 	the
attached 	comment 	in 	response 	to 	the 	Federal 	Communications
Commission's 	(FCC) 	Notice 	of 	Proposed Rulemaking 	(NPRM) 	to
evaluate 	the 	bundling 	of 	cellular premises 	equipment 	(CPE) 	and
cellular 	service. 	Under 	current 	FCC 	rules, 	all 	facilities-based
providers 	of 	cellular 	service 	(i.e., 	those 	who 	are 	licensed by
the 	FCC 	to 	use 	the 	spectrum reserved 	for 	mobile 	phone 	service)
are 	prohibited 	from 	"bundling". 	In 	the 	NPRM, 	the 	FCC 	seeks
comments 	on 	"the benefits 	or possible 	adverse 	consequences 	of
eliminating 	or 	substantially modifying 	the 	current 	cellular
antibundling 	policy," 	and 	on 	their tentative 	conclusion 	that 	"a
consideration 	of 	all 	the 	factors 	, 	and 	the 	existence 	of 	the
antitrust 	laws, 	warrant 	allowing 	the 	bundling 	of 	cellular 	service
and 	CPE."
Given 	that 	competitive harm 	is 	unlikely 	if 	no market 	power
exists 	in 	either the 	cellular 	service 	or 	the 	CPE market, 	this
comment 	recommends 	that 	the 	extent 	of market 	power be 	used 	as 	a
first 	screen to 	separate 	harmless 	or 	beneficial 	from 	potentially
harmful 	bundling. 	While 	the 	staff 	concludes 	that 	CPE 	is 	produced
and 	sold 	in 	a 	competitive market, 	it disagrees 	with 	the 	FCC's
tentative 	conclusion 	that 	cellular 	service 	is 	produced 	in 	a
competitively 	structured market, 	which 	leaves 	open 	the
theoretical 	possibility 	that 	bundling may 	be 	used 	for
anticompetitive 	purposes.
Even 	if 	bundling 	can be used, 	in 	theory, 	for 	anticompetitive
iii

purposes, 	it 	should 	not 	necessarily 	be 	prohibited 	on 	a 	per 	se
basis. 	This 	staff 	comment 	examines 	both 	pro-competitive 	uses 	of
bundling 	(including 	using bundling 	to 	pursue 	promotional 	and
. transaction-cost 	efficiencies) 	and 	anti-competitive 	uses 	of
bundling 	(including using 	bundling 	to monopolize 	the 	CPE market,
to 	engage 	in 	price discrimination, 	and 	to 	evade 	rate-of 	return
regulation). 	This 	examination 	leads 	us 	to 	conclude 	that 	the
potential 	for 	competitive harm, 	while 	theoretically possible,
does 	not 	appear 	likely, 	and 	seems 	unlikely 	to 	outweigh 	the 	gains
from 	pro-competitive uses 	of 	bundling. 	Further, 	any 	cases
identified 	in the 	future 	that 	raise 	anticompetitive 	concerns
could be 	Subject 	to 	a 	case-by-case 	review under 	the 	antitrust
laws.
Overall, 	the 	staff 	concludes 	that 	a 	per 	se 	prohibition 	of
bundling 	in 	this 	market 	is 	not 	warranted, 	and 	supports 	the 	FCC's
tentative 	conclusion 	to 	allow 	carriers 	to 	bundle 	cellular 	service
and 	CPE.
iv

BEFORE THE 	'
FEDERAL COMMUNICATIONS 	COMMISSION
WASHINGTON, 	D. 	C. 	20554
In The Matter of
Bundling of Cellular CUstomer
Premises Equipment and
Cellular Service
)
)
)
)
)
CC Docket No. 	91-34
Comment of 	the Staff of
the 	Bureau of Economics	. 	. 	.of the 	Federal 	Trade Comm1ss10n
I. 	Introduction
The 	staff 	of 	the 	Federal 	Trade 	Commission 	(FTC) 	appreciates
this 	opportunity 	to 	respond 	to 	the 	Federal 	Communications
commission's 	(FCC) 	Notice 	of 	Proposed Rulemaking. 1 The 	FCC 	is
seeking comments 	on 	"the benefits 	or 	possible 	adverse
consequences 	of 	eliminating 	or SUbstantially modifying 	the
current 	cellular antibundling 	policy." 	Our 	comment 	addresses
certain 	issues 	relating 	to 	economic 	efficiency 	and 	competition,
based upon 	price 	theory 	and welfare 	economics 	as 	understood 	in
the 	interpretation and 	enforcement 	of 	the 	antitrust 	laws. 	Except
. 	. 	.Th1S comment represents the V1ews of the staff of the Bureau
of 	Economics 	of 	the 	Federal 	Trade 	Commission. 	They 	are 	not
necessarily 	the 	views 	of 	the 	Commission 	or 	any 	individual
Commissioner. 	Inquiries regarding this comment should be directed
to 	Bruce 	H. 	Kobayashi 	(202-326-3363) 	of 	the 	FTC's 	Bureau 	of
Economics.
1 See Notice of Proposed Rulemaking, 	In the Matter of Bundling
of 	Cellular 	CUstomer 	Premises 	Equipment 	and 	Cellular 	Service, 	CC
Docket 	No. 	91-34, 	Released March 	27, 	1991.
1

as 	noted, 	it 	does 	not 	discuss 	other 	policy 	considerations, 	such
as 	distributional 	issues, 	that may 	be 	relevant 	to 	the 	FCC.
section 	II 	summarizes 	the 	expertise 	of 	the 	staff 	of 	the
Federal 	Trade 	Commission. 	Section 	III 	summarizes 	the 	issues
contained 	in 	the 	NPRM. 	section 	IV 	contains 	an 	economic 	analysis
of 	the 	practice 	of bundling. 	Part A of 	the 	section 	examines 	the
structure 	of 	both the 	cellular 	service 	and 	consumer 	premises
equipment 	(CPE) 	markets. 	The 	staff 	agrees 	with 	the 	tentative
conclusion 	in 	the 	NPRM 	that 	the 	CPE market 	is 	competitively
structured. 	However, 	we 	cannot 	conclude 	that 	the 	cellular
service market 	is 	competitive, 	nor 	can we 	conclude 	that 	cellular
resellers 	provide 	competition 	to 	the 	facilities-based 	cellular
carriers. 	Part 	B of 	this 	Section examines 	uses 	of 	the 	practice
of 	bundling 	identified 	in 	the 	economics 	literature. 	First, 	we
examine 	transaction 	costs 	explanations 	for 	bundling. 	Second, 	the
use 	of 	bundling 	as 	a 	potentially 	efficient 	promotional 	device 	is
examined. 	Because 	this 	explanation 	for 	bundling 	appears 	likely
to 	pertain 	to 	the 	cellular market, 	we 	find 	that 	a 	prohibition 	on
bundling 	is 	likely 	to 	induce 	cellular 	carriers 	to 	switch 	to
alternative 	promotional 	devices 	that 	are 	less 	preferred 	by
consumers. 	Third, 	we 	examine 	the 	potential 	use 	of 	bundling 	to
monopolize 	the 	CPE market. 	Fourth, 	we 	examine 	the 	possibility
that 	bundling 	is 	used 	as 	a 	price 	discrimination 	device. 	Finally,
the 	potential 	use 	of 	bundling 	to 	evade 	rate-of-return 	regUlation
is 	examined. 	Although monopolization 	of 	the 	CPE market, 	price
discrimination, 	and 	evasion 	of 	rate-of-return 	regUlation 	are
2

theoretically 	possible, 	we 	conclude 	that 	these 	potential 	concerns
do 	not 	provide 	a 	compelling 	reason 	to 	impose 	a 	per 	se 	ban 	on
bundling. 	Section V concludes 	the 	comment.
II. 	Expertise of 	the Staff of the 	Federal 	Trade 	Commission
The 	FTC 	is 	an 	independent 	regulatory 	agency 	responsible 	for
maintaining competition and 	safeguarding the 	interests 	of
consumers. 2 	In 	response 	to 	requests 	by 	federal, 	state, 	and 	local
government 	bodies, 	the 	staff 	of 	the 	FTC 	often 	analyzes 	regulatory
or 	legislative 	proposals 	that may 	affect 	competition 	or the
efficiency 	of 	the 	economy. 	In 	the 	course 	of 	this 	work, 	as 	well
as 	in 	antitrust 	and 	consumer 	protection 	research, 	nonpublic
investigations, 	and 	litigation, 	the 	staff 	applies 	established
principles 	and 	recent 	developments 	in 	economic 	theory 	to
competition and 	consumer 	protection 	issues, 	including 	efficiency
rationales 	for 	rate 	and 	entry 	regulation. s
The 	FTC 	staff 	has 	commented 	on 	a 	variety 	of 	other 	issues
before 	the 	FCC, 	including: 	(1) 	competition, 	rate 	deregulation 	and
the 	FCC's 	pOlicies 	relating 	to 	the 	provision 	of 	cable 	television
service;· 	(2) 	elimination 	of 	the 	prohibition on 	common 	ownership
2 15 	U.S.C. 	§§ 	41 	- 	59.
3 	See, 	~, 	Mathios 	and 	Rogers, 	The 	Impact 	of 	State 	Price
and 	Entry Regulation 	on 	Intrastate 	Long 	Distance 	Telephone 	Rates,
Bureau 	of 	Economics 	staff Report 	to 	the 	Federal 	Trade 	Commission,
November 	1988.
• 	See Comment 	of the 	Staff of the 	Bureau 	of Economics 	and the
San 	Francisco Regional 	Office 	of 	the 	Federal 	Trade 	Commission, 	In
the 	Matter 	of 	Competition, 	Rate 	Deregulation and 	the 	Commission's
Policies Relating to the 	Provision of Cable Television Service, 	MM
3

of 	cable 	television 	systems 	and 	national 	television 	networks;6
(3) 	rules 	relating 	to 	whether cable 	television 	systems 	"must
carry" 	television 	broadcast 	signals;6 	(4) 	the 	FCC 	requirement
that 	broadcast 	licenses 	be 	held 	for 	at 	least 	three 	years 	before
being 	transferred;7 	(5) 	rules 	relating 	to 	the 	network 	ownership
of 	financial 	interests 	and 	syndication 	rights;8 	(6) 	the
allocation 	of 	spectrum and 	setting 	of 	standards 	for 	digital 	audio
broadcasting;9 	and 	(7) 	the 	regulation 	of 	900-number 	services. 10
III. 	Background of and 	Issues 	contained 	in the NPRM
The 	FCC 	is 	soliciting comments 	on whether 	it 	should 	allow
cellular 	service 	carriers 	to 	engage 	in 	"bundling", 	offering 	a
subscriber 	a 	bundle 	of 	two 	products 	{cellular 	service 	and
consumer premises 	equipment 	(CPE» 	together 	at 	a 	single 	price. 11
This 	practice 	has 	generally 	resulted 	in 	a 	bundle 	price 	that 	is
lower 	than 	the 	subscriber 	could 	obtain by 	purchasing 	the 	CPE 	and
Docket No. 	89-600, 	April 	20, 	1990.
6 CT 	Docket 	No. 	82-434.
6 MM 	Docket 	No. 	85-349.
7 BC 	Docket 	No. 	81-897.
8 MM 	Docket 	No. 	82-345 	and MM 	Docket 	No. 	90-162.
9 GEN 	Docket 	No. 	90-357.
10 CC 	Docket No. 	91-65.
11 There are numerous sellers of the CPE 	(mobile phones). 	The
structure 	of the CPE market 	is discussed 	in more detail 	in Section
IV.A of 	this 	comment, 	infra.
4

service 	separately. 	The 	Notice 	"tentatively 	concludes 	that 	a
consideration 	of 	all 	of 	the 	factors 	••. 	and 	the 	existence 	of 	the
antitrust 	laws, 	warrant 	allowing 	the 	bundling 	of 	cellular 	CPE 	and
service. ,,12 	The 	practice 	of 	bundling 	is 	distinct 	from 	"tying"
because 	the 	cellular 	carrier will 	be 	required 	to 	offer 	cellular
service 	separately 	at 	nondiscriminatory 	rates. 1S
Current 	FCC 	rules 	prohibit 	facilities-based 	providers 	of
cellular 	service 	(i.e., 	those who 	are 	licensed by 	the 	FCC 	to 	use
the 	spectrum 	reserved 	for mobile 	phone 	service) 	from 	"bundling".
FCC 	rules 	also 	limit 	the 	number 	of 	facilities-based 	providers 	of
cellular 	service per 	Cellular Geographic 	Service Area 	(CGSA) 	to
no 	more 	than 	two. 1• 	These 	facilities-based 	providers 	are 	the
only 	sellers 	of 	service 	at 	the 	wholesale 	level. 	At 	the 	retail
level, 	facilities-based 	providers 	of 	cellular 	service market
12 	See NPRM, 	supra, 	section 	III, 	p. 	2.
13 	That 	is, 	the 	cellular 	carriers 	must 	make 	cellular 	service
separately 	available 	at 	a 	uniform 	wholesale 	price. 	See 	NPRM,
section 	I. 	The 	requirement 	for 	non-discriminatory 	pr1c1ng
prohibits 	cellular 	carriers 	from 	conditioning 	cellular 	service
prices 	on 	certain 	attributes 	of 	the 	consumer 	(~, 	whether 	he 	is
a 	new 	or 	repeat 	subscriber, 	or where 	a 	new 	subscriber 	chooses 	to
purchase CPE) , 	and would appear to eliminate, 	in this 	setting, 	the
concern 	that 	the 	separate-purchase 	option 	might 	be 	rendered
illusory 	by 	exorbitant 	prices. 	The 	type 	of 	bundling, 	presented
here, 	where 	the 	goods 	in 	the 	bundle 	are 	separately 	available, 	is
commonly referred to as 	"mixed bundling." 	with 	"pure bundling" 	or
"tying," 	only 	the 	bundle 	is 	made 	available. 	For 	more 	complete
discussion 	of 	the 	economics 	of 	bundling 	and 	tying, 	see 	Klein 	and
Saft, 	"The 	Law 	and 	Economics 	of 	Franchise 	Tying 	Contracts," 	28
Journal 	of 	Law 	and 	Economics 	345-361 	(1985) 	and 	Section 	IV. B,
infra.
14 	The 	CGSA' s 	generally 	correspond 	to 	standard 	metropolitan
statistical 	areas. 	See 	47 	C.F.R. 	§ 	22.903.
5

their product 	through many 	types 	of 	outlets, 	including 	direct
sales 	forces, 	commissioned 	agents, 	and 	local 	and 	national 	retail
chains. IS 	In 	addition, 	the 	FCC mandates 	that 	resellers 	(i.e.,
retailers 	not 	part 	of 	the 	facilities-based 	carriers' 	preferred
retail 	distribution 	system) 	be 	able 	to 	purchase 	at
nondiscriminatory 	prices wholesale 	service 	from 	the 	facilities-
based 	carriers 	for 	resale.
This 	rulemaking 	stems 	from 	a 	petition 	filed 	by 	the 	National
Cellular Reseller's 	Association 	(NCRA) .16 	In 	its 	petition, 	the
NCRA 	requested 	the 	FCC 	to 	reaffirm 	its 	prohibition 	against
bundling 	by 	facilities-based 	cellular 	carriers. 	The 	resellers
claim that 	the 	FCC has 	not 	enforced 	its 	prohibition 	against
bundling, 	and 	has 	allowed 	the 	facilities-based 	carriers
indirectly 	to 	bundle 	service 	and 	CPE. 17 Rather 	than 	ruling 	on
the 	NCRA petition, 	the 	FCC 	instituted 	this 	rulemaking 	to
determine whether 	its 	policy 	on 	bundling 	"should be 	eliminated,
IS 	See, 	~, 	Comments 	of 	the 	Cellular 	Telecommunications
Industry Association, 	(CTIA) 	In the Matter of Bundling of Cellular
Customer Premises Equipment and Cellular Service, 	CC Docket 19-34,
May 	20, 	1991, 	pp. 	3-4.
16 See 	NCRA petition, 	December 	23, 	1988.
17 	See 	also 	Comments 	of 	Cellnet Communications, 	In 	the Matter
of 	Bundling 	of 	Cellular 	Customer 	Premises 	Equipment 	and 	Cellular
Service, 	CC 	Docket 	No. 	91-34, 	May 	20, 	1991, 	pp. 	2-4. 	Some 	states
maintain more 	restrictive 	rules 	on 	bundling. 	See,~, Comments
of 	the 	People 	of 	the 	State 	of 	California 	and 	the 	Public 	utilities
Commission 	of 	the 	State 	of 	California, 	In 	the 	Matter 	of 	Bundling
of 	Cellular 	Customer 	Premises 	Equipment 	and 	Cellular 	Service, 	CC
Docket 	91-34, 	May 	20, 	1991~
6

substantially modified, 	or 	clarified. ,,18
IV. 	An Analysis of Bundling
In 	this 	section, 	we 	examine 	the 	likely 	effects 	on 	consumers
from 	repeal 	of 	the 	FCC's 	antibundling 	rule. 	Given 	that 	bundling
of 	two 	products 	is 	unlikely 	to 	harm consumers 	if 	no market 	power
exists 	in 	either market, 	the 	extent 	of market 	power 	is 	used 	as 	a
first 	screen to 	separate harmless 	or beneficial 	from 	potentially
harmful 	bundling. 19 In 	Part A of 	this 	Section, 	the 	staff 	agrees
with 	the 	FCC's .tentative 	conclusion 	that 	CPE 	is 	produced 	and 	sold
in 	an 	unconcentrated 	and 	competitive market. 	However, 	the 	staff
disagrees 	with 	the 	tentative 	conclusion 	that 	cellular service 	is
produced 	in 	a 	competitively 	structured market.
Because 	the 	staff 	cannot 	rule 	out 	the 	existence 	of market
power 	in 	the market 	for 	cellular 	service, 	Part 	B of 	this 	Section
provides 	an 	analysis 	of 	the 	likely competitive 	effects 	of
bundling 	in 	this market. 	Even 	if market 	power 	is 	found 	to 	exist,
the 	restraint 	(bundling) 	should not 	necessarily 	be 	condemned 	on 	a
per 	se 	basis. 	A per 	se 	condemnation 	of 	bundling would 	be
appropriate 	only 	if 	the 	existence 	of 	a 	net 	anticompetitive 	effect
is 	probable, 	and 	the 	costs 	of 	a 	case-by-case 	evaluation 	exceed
the 	benefits 	from 	allowing bundling 	in 	limited 	circumstances. 	We
18 	See 	NPRM, 	supra 	note 	1, 	at 	n. 	9.
19 A similar 	standard 	has 	been 	adopted 	by 	the 	Federal 	Courts
in 	tying 	cases. 	See 	Jefferson 	Parish 	Hospital 	District 	No. 	2 	v.
Hyde, 	466 	U.S. 	2 	(1984).
7

examine both pro-competitive 	and 	anti-competitive 	uses 	of
bundling, 	and 	conclude 	that 	the 	theoretical 	potential 	for
competitive harm does 	not 	appear 	likely 	to materialize 	in 	this
setting. 	Given 	the 	procompetitive 	explanations 	for 	bundling, 	our
analysis 	concludes 	that 	a 	per 	se 	condemnation 	of 	bundling 	in 	this
market 	is 	not warranted. 	Further, 	any 	cases 	identified 	in 	the
future 	that 	raise 	anticompetitive 	concerns 	could be 	subject 	to 	a
case-by-case 	review under 	the 	antitrust 	laws.
A. 	Market power 	in the provision of CPE and Cellular
Service
The 	NPRM 	suggests 	that 	the 	market 	for 	CPE 	is 	competitive. 20
There 	seems 	to 	be 	general 	agreement 	on 	this 	point. 	Cellular
phones 	are manufactured 	in 	an 	unconcentrated 	industry by 	a 	large
number 	of 	national 	and 	international 	companies. 21 Barriers 	to
entry 	seem 	low, 	and 	recent 	entry by 	firms 	engaged 	in 	the 	consumer
20 ~ NPRM, 	supra 	note 	1, 	at 	10.
21 	According 	to 	the 	North 	American 	Telecommunications
Association, 	there are 15 suppliers 	of cellular phones to the u.s.
Market, 	inclUding 	foreign 	suppliers 	such 	as 	Toshiba, 	NEC,
Panasonic, 	Uniden, 	Mitsubishi, 	and 	Oki. 	There 	are 	three 	basic
types 	of 	cellular 	phones: 	mobile, 	used 	primarily 	in 	automobiles;
transportable, 	which 	can 	used 	either 	in 	a 	car 	or 	carried 	in 	a
pouch; 	and portable, 	or "pocket-sized" 	phones. 	According to their
figures, 	no 	supplier has 	more 	than 	15 	percent 	of 	the 	mobile 	phone
sales, 	which 	account 	for 	69 	percent 	of 	total 	U. 	S. 	CPE 	sales 	(by
units). 	Motorola 	is 	the 	largest 	U. 	S. 	based 	supplier 	of 	CPE
equipment, 	with 	35 	percent 	of 	portable phone 	sales 	(Which 	account
for 19 percent of total CPE sales), 	and 10 percent of transportable
phone sales 	(Which account 	for 	22 	percent of 	the total 	CPE sales).
See Comments of the North American Telecommunications Association,
In the Matter of Cellular Customer Premises Equipment and Cellular
Service, 	CC 	Docket 	No. 	91-34, 	May 	20, 	1991, 	Attachment A.
8

electronics 	industry has 	been 	observed. 22
However, 	there 	is 	not 	general 	agreement 	with 	the 	NPRM's
tentative 	conclusion that 	cellular 	service 	is 	"sufficiently
competitive" 	and 	is 	produced 	in 	an 	industry with 	a 	"competitive
structure. ,,28 	The NPRM 	states 	that 	"wi thin 	each market,
facilities-based 	carriers 	compete 	not 	only with 	each 	other, 	both
directly 	and 	through 	agents, 	but 	also 	with 	numerous 	resellers. ,,24
The NPRM 	also 	notes 	that 	cellular companies 	"must 	also 	compete
with 	other types 	of 	communications 	services, 	such 	as 	paging 	and
wireline 	service. ,,26
1. 	The 	structure 	of 	the 	Cellular Service 	Industry
The U. 	S. 	Department 	of Justice Merger Guidelines 	set 	out 	a
method 	used 	by 	the 	antitrust 	agencies 	to 	determine 	whether 	a
product 	or group 	of 	products 	constitute 	an 	antitrust 	market. 26
An 	antitrust market 	consists 	of 	the 	product 	or group 	of 	products
for 	which 	a 	hypothetical 	monopolist would 	find 	profitable 	a 	small
but 	significant 	and 	non-transitory 	increase 	in 	the 	price 	over
competitive 	levels, 	assuming 	initially that 	entry 	into 	the
22 	For 	example, 	Kenwood, 	a 	producer 	of 	home 	and 	car 	audio
equipment 	recently 	entered 	the 	CPE 	market, 	and 	other 	electronics
manufacturers such as Sony have announced their 	intention to enter
the 	market. 	See 	Comments 	of 	the 	CTIA, 	supra 	note 	15.
28 See 	NPRM, 	supra 	note 	1, 	§III.13 	and 	n. 	15.
24 See 	NPRM, 	supra 	note 	1, 	§III.12.
26 See 	NPRM, 	supra 	note 	1, 	§III.13.
26 See 	the U.S. 	Department 	of Justice Merger Guidelines, 	June
14, 	1984, 	Section 	2.21, 	reprinted 	in 	4 	Trade 	Reg. 	Rep. 	(CCH) 	para
13.103.
9

production 	of 	the 	product(s) 	would 	not 	occur. 	An 	important 	step
in 	the 	process 	is 	to 	see whether 	consumers 	can 	find 	acceptable
substitutes 	for 	the 	products 	or 	services 	included 	in 	the
candidate market. 	If 	so, 	the 	candidate market 	is 	expanded 	to
include 	these 	products. 	Once 	the 	relevant 	market 	is 	defined, 	the
method goes 	on 	to 	consider whether 	the 	structure 	of 	this 	market
is 	likely 	to 	be 	conducive 	to 	non-competitive 	pricing. 	The
structure 	of 	the market, 	along with 	other 	factors 	(such 	as
conditions 	of 	entry), 	is 	used 	as 	a 	proxy 	for 	determining whether
the 	firms 	in 	the market 	might 	possess 	market 	power. 27
For 	the 	purposes 	of 	this 	rulemaking, 	the 	aim would 	be 	to
examine, 	empirically, 	whether 	the 	availability 	of 	other
communications 	services 	(~, 	paging 	and wireline 	services)
would 	prevent 	a 	hypothetical 	monopolist 	of wholesale 	cellular
services 	(in 	a 	given 	CGSA) 	from 	raising 	price 	above 	the
competitive 	level. 	The 	question 	of 	the 	demand 	substitution 	is
crucial 	because 	if 	these 	alternatives would 	not 	prevent 	an
anticompetitive 	price 	increase, 	then wholesale 	cellular 	service
would 	be 	considered 	a 	relevant 	antitrust 	market. 	Any 	evidence
the 	FCC 	has 	collected 	on 	this 	empirical 	issue would 	help 	greatly
in 	determining whether 	or not 	providers 	of wholesale 	cellular
service 	have 	market 	power. 	But 	because we 	find 	that 	this 	issue
has 	not 	been 	clearly 	resolved, 	we 	adopt, 	in 	this 	comment, 	the
conservative 	assumption 	that 	competition 	from 	other 	services 	is
27 See the U. 	S. 	Department of Justice Merger Guidelines, 	supra
note 	26.
10

too 	insubstantial 	to 	constrain 	facilities-based 	carriers 	from
exercising market 	power. 28
Under 	current 	FCC 	rules, 	no more 	than 	two 	facilities-based
carriers 	are 	allowed 	in 	each 	CGSA. 29 Thus, 	these 	rules 	place 	an
absolute 	barrier to 	entry 	into 	the 	provision 	of wholesale
cellular 	service, 	and 	limit the 	number 	of 	providers 	of wholesale
cellular 	service 	in 	each CGSA 	to 	two. w Under 	the 	assumption
that 	wholesale 	cellular service 	constitutes 	a 	relevant 	antitrust
market, 	the 	Herfindahl-Hirschman 	Index 	(HHI), 	which 	is 	used 	to
measure 	the 	extent 	of market 	concentration, 	would be, 	at minimum,
5000, SI well 	above 	the 	"highly concentrated" 	threshold 	contained
28 	The 	NPRM 	and 	many 	of 	the 	comments 	have 	noted 	that 	the
federal 	courts have ruled that a 	"cellular carrier may not be found
to have market power 	in the service market." 	See Metro Mobile CTS
v. 	New 	Vector 	Communications, 	661 	F. 	SUpp. 	1504, 	1522-1525 	(D.
Ariz. 	1987), 	aff t d 	892 	F. 	2d. 	(9th 	Cir. 	1989). 	However, 	this
decision relates to the ability of the wireline cellular franchisee
(in 	this 	case 	New 	Vector) 	to 	exercise 	market 	power 	vis 	a 	vis 	the
non wireline franchisee 	(Metro Mobile) 	during the headstart period.
In 	terms 	of 	the 	market 	definition 	exercise, 	the 	court 	found 	that
New 	Vector, 	alone, 	did 	not 	possess 	market 	power. 	However, 	the
court 	did 	not 	rule 	on 	the 	guidelines 	market 	definition 	issue 	of
whether the two cellular franchisees together possess market power.
29 	See 	the 	discussion 	in 	note 	14, 	supra.
so 	See 	Oemsetz, 	"Barriers 	to 	Entry," 	72 	American 	Economic
Review 	47-58 	(1982).
SI 	The 	HHI 	is 	the 	sum 	of 	the 	squared 	market 	shares 	of 	the
firms 	in a 	market. 	In a 	duopoly, 	the 	least concentrated market 	is
a 	market where each of the two firms has a 	50 percent market share.
The 	HHI 	in 	this 	case 	equals 	50 2 + 	50 2 = 5000.
11

in 	the 	Department 	of Justice Merger Guidelines. 82
2. 	Competition between 	Resellers 	and 	Facilities-Based
Carriers
In 	the 	NPRM, 	the 	FCC 	relies 	on 	cellular 	resellers 	to 	provide
competition 	to 	the 	facilities-based 	cellular 	carriers. 88 It 	is
unlikely 	that 	cellular 	resellers 	will 	provide 	effective
competition 	at 	the wholesale 	level 	to 	the 	two 	facilities-based
cellular 	carriers. 	Although 	the 	presence 	of 	resellers 	has 	been
found 	to 	provide 	a 	competitive 	influence 	in 	other markets, 	such
as 	the 	provision 	of wireline 	toll 	service within 	Local 	Access 	and
Transport Areas 	(intraLATA), 	we 	do 	not 	expect 	that 	cellular
resellers 	will 	have 	a 	similar 	effect. 8' 	Resellers 	operating 	in
the 	intraLATA toll 	telephone 	service 	can 	purchase 	service 	from
facilities-based 	long distance 	carriers. 	In 	essence, 	these 	long
distance 	companies 	provide 	an 	alternative 	source 	of 	competition
at 	the 	wholesale 	level 	to 	the 	local 	Bell 	operating 	Company 	(BOC)
through 	the 	resellers. 	Thus, 	it 	is 	the 	presence 	of 	an
alternative 	source 	of 	competition 	to 	the 	BOCs 	at 	the 	wholesale
82 	The 	Guidelines 	define 	markets 	where 	the 	HHI 	is 	above 	1800
to 	be 	highly 	concentrated. 	See 	the 	U. 	S. 	Department 	of 	Justice
Merger 	Guidelines, 	supra 	note 	26, 	§3.11. 	"Highly 	concentrated"
markets 	receive 	the most 	scrutiny under 	the 	Guidelines.
33 See 	NPRM, 	supra 	note 	1, 	§III.13.
84 Mathios 	and 	Rogers, 	supra 	note 	3, 	pp. 	51-52 	found 	that 	the
existence 	of 	resellers 	in 	the 	intraLATA 	market 	lowered 	prices.
They 	found 	that 	rates 	for 	intraLATA 	toll 	service 	were 	about 	7.5
percent 	higher 	in 	states 	that 	restrict 	both 	facilities-based
carriers 	and 	resellers 	from 	competing 	with 	the 	Bell 	Operating
Companies 	(BOC) 	in providing this service. 	Restricting facilities-
based 	carriers 	(but 	not 	resellers) 	from 	providing 	intraLATA 	toll
service 	did 	not 	result 	in 	higher prices.
12

level, 	and 	not 	the 	presence 	of 	rese11ers, 	per 	se, 	that 	provides
the 	observed 	competitive 	influence. 	Rese11ers 	in 	the 	intraLATA
service 	facilitate 	competition by 	providing a 	retail 	outlet 	for
an 	alternative 	source 	of wholesale 	competition.
In 	contrast, 	no 	similar 	source 	of wholesale 	competition 	to
the 	facilities-based 	cellular 	licensees 	exists, 	so 	the 	cellular
rese11er 	cannot 	serve 	the 	sameprocompetitive 	function 	as 	the
intraLATA 	rese11er. 	Thus, 	while 	rese11ers 	can 	provide 	additional
competition 	at 	the 	retail 	level, 	they 	cannot 	provide 	a 	check 	on
the 	ability 	of 	the 	facilities-based 	carriers 	to 	exercise market
power. 	Even with 	intense 	retail 	competition, 	the 	two 	facilities-
based 	cellular 	carriers 	potentially 	can 	force 	the 	consumer 	to 	pay
a 	supracompetitive 	price by 	setting wholesale 	service 	prices 	at
supracompetitive 	levels. 	Furthermore, 	given 	the 	competitive
state 	of 	the 	retail 	cellular market, 	it 	is 	unclear what marginal
contribution 	rese11ers 	make 	in 	the 	retail 	market. 86 Rese11ers
currently 	compete with 	a 	large 	number and variety 	of 	retail
outlets 	in 	a 	competitive 	retail 	market, 	and 	it 	seems 	unlikely
that 	their 	absence would 	result 	in 	a 	reduction 	in 	competition 	at
the 	retail 	level.
Much 	of 	the 	opposition 	to 	the 	proposal 	to 	lift 	the 	FCC's
prohibition 	of 	bundling 	has 	come 	from 	rese11ers. 	Rese11er
complaints, 	both 	in 	response 	to 	the NPRM 	and 	in 	court 	cases,
claim that 	the 	facilities-based 	carriers 	are 	engaging 	in 	a
86 	See 	the 	discussion 	surrounding note 	15, 	supra.
13

predatory 	IIprice-cost 	squeezell 	(i.e., 	increasing 	the 	uniform
wholesale 	cellular price 	charged 	to 	retailers 	and 	reducing 	the
retail 	price 	charged by 	the vertically-integrated 	retailers
through 	commissions 	or 	other 	incentive 	payments) .86 	As 	is 	the
case 	in 	almost 	all 	alleged 	instances 	of 	predation, 	however, 	the
observable 	implications 	of 	attempted predation 	(~, 	small
margins, 	selective 	commissions 	or promotional 	payments 	to
retailers) 	are 	difficult 	to 	differentiate 	from 	the 	observable
implications 	of 	intense 	retail 	competition and 	from 	the 	use 	of 	an
efficient 	distribution 	system. 87 And given 	that 	the 	ability 	of 	a
wholesaler 	to 	choose 	how 	to 	distribute 	his 	products 	may 	have 	a
significant 	impact 	on 	the 	type 	of 	services 	or 	the 	quality 	of 	the
product 	provided, 	interference 	in 	these 	relationships 	should be
86 	See 	NPRM, 	supra 	note 	1, 	§II.3, 	and 	Metro 	Mobile 	v. 	New
Vector, 	supra 	note 	28.
87 	See, 	~, 	Miller 	and 	Pautler, 	"Predation: 	The 	Changing
View 	in Economics 	and the Law," 	18 Journal 	of 	Law & Economics 	495-
502 	(1985). 	See 	also 	Cargill. 	Inc. 	and 	Excel 	Corp. 	v. 	Monfort 	of
Colorado« 	Inc. 	107 	S. 	Ct. 	484, 	491-493 	(1986). 	In 	general, 	if
there 	are 	no 	quality 	control 	problems 	at 	the 	retail 	level, 	it 	is
in the interest of even a monopoly wholesaler to have a 	competitive
margin at the retail 	level 	in order to avoid a 	successive monopoly
problem. 	See, 	~, 	Posner 	and 	Easterbrook, 	Antitrust 	Cases,
Economic 	Notes 	and 	Other 	Materials, 	(2d. 	ed. 	1981) 	pp. 	875-76.
Thus, 	one 	also 	would 	expect 	to 	observe 	small 	retail 	margins 	in 	an
efficient 	and 	competitive 	retail 	market. 	If 	there 	are 	quality
control 	problems 	at 	the 	retail 	level, 	the 	wholesaler 	may 	wish 	to
limit competition at the retail 	level. 	See Klein and Leffler, 	"The
Role· of 	Market 	Forces 	in 	Assuring 	Contractual 	Performance, II 	89
Journal 	of Political Economy 	615-641 	(1981), 	and Klein and Murphy,
IIvertical 	Restraints 	as 	Contract 	Enforcement 	Mechanisms," 	31
Journal 	of 	Law 	& 	Economics 	265-298 	(1988). 	The 	quasi-rents
resulting 	from 	limiting 	competition 	at 	the 	retail 	level 	act 	as 	a
reward 	to 	those 	retailers 	who 	actually 	provide 	high 	quality
service.
14

approached with 	caution. 38 As 	the 	Department 	of Justice 	noted 	in
examining 	this 	market 	in 	1986:~
"As 	is 	recognized 	in antitrust 	law and 	economic 	literature,
allowing 	firms 	to 	select 	their 	own 	distribution 	networks 	is
generally the most 	efficient government 	policy. 	Thus, 	in
the 	absence 	of 	a 	showing 	of 	likely 	anticompetitive 	effect
from 	a 	particular distribution 	system, 	regulatory
constraints 	on 	a 	cellular carrier's 	decision 	as 	to 	which
dealers 	should 	resell 	its 	service 	are 	unwarranted 	and would
not 	serve 	the 	public 	interest 	in 	efficient 	distribution 	of
cellular 	service."
The NPRM 	requests 	comment 	on how 	changing the 	bundling 	rule
will 	affect 	resellers. 4o To 	the 	extent 	that 	elimination 	of 	the
rule 	allows 	the 	cellular 	service 	companies 	to 	utilize 	their
preferred distribution 	systems more 	intensively, 	and 	to 	the
extent that 	resellers 	are 	not 	part 	of 	this 	preferred 	system,
resellers may 	be 	adversely affected. 	However, 	the 	possibility
that 	one 	type 	of 	retailer may be 	harmed, 	by 	itself, 	does 	not
provide 	a 	basis 	for 	a 	rule 	that 	limits 	the 	use 	of 	a 	potentially
efficient 	contract 	or 	retail 	distribution 	system. 	Given these
considerations, 	and 	given 	that 	resellers 	are 	not 	likely 	to
improve 	industry performance 	at 	either the 	wholesale 	or 	retail
~ See 	the 	discussion 	in 	note 	37, 	supra.
39 	See 	Comments 	of 	the 	Department 	of 	Justice, 	In 	re 	Request
of 	Cellular 	Telephone 	Company 	for 	Declaratory 	RUling 	that
Nonwireline 	Cellular 	Carriers 	Should 	Not 	Be 	Required 	to 	Provide
Resale Service to Operating Wireline Cellular Carriers 	in the Same
Market, 	Ref. 	No. 	64400-SAW, 	June 	3, 	1986.
40 In the NPRM, 	the FCC notes that 	"the 	justifications for the
Commission's 	original 	adoption 	of 	anti-bundling 	policies 	did 	not
focus 	on 	any 	impact 	of 	those 	policies 	on 	resellers. 	Rather, 	the
unbundling requirements were intended to protect ratepayers and to
promote competition 	in the CPE marketplace." 	See NPRM, 	supra note
1, 	§ 	III.19.
15

level, 	there 	does 	not 	seem 	to 	be 	a 	compelling 	basis, 	based upon
reseller 	complaints, 	to 	regulate vertical 	relationships 	between
cellular 	carriers 	and 	their 	retailers.
B. 	Economic Reasons 	for 	Bundling
In 	this 	section, 	uses 	of 	bundling 	that 	have 	been 	identified
in 	the 	economic 	literature 	are 	explored 	and 	considered 	in 	the
context 	of 	the 	cellular service market. 	Part 	B.1 	reviews
transactions 	cost 	explanations 	for 	bundling. 	Part 	B.2 	reviews
the 	economic 	literature on 	promotional 	pricing 	and 	applies 	this
to 	the 	bundling 	of 	CPE 	and 	cellular 	service. 	Part 	B.3 	examines
the 	"leverage" 	theory 	of 	bundling. 	Part 	B.4 	examines 	price
discrimination 	explanations 	of 	bundling. 	Finally, 	Part 	B.5
examines 	the 	use 	of 	bundling 	to 	evade 	rate-of-return 	regulation.
1. 	Bundling 	and 	Efficient 	Packaging
As 	noted 	in 	the 	NPRM, 	"packaged offerings 	are 	commonplace 	in
a 	variety 	of 	industries 	in which customers 	can 	purchase 	a 	number
of 	goods 	in 	a 	package 	at 	a 	lower price 	than 	the 	individual 	goods
could 	be 	purchased 	separately." 	The 	courts 	have 	recognized 	that
"there 	is 	nothing 	inherently 	anticompetitive 	about 	packaged
,
sales," 	and 	under 	the 	federal 	antitrust 	laws, 	these 	packaged
offerings 	are 	legal 	unless 	they 	constitute 	an 	illegal 	tie-in 	or
otherwise 	represent 	an 	unlawful 	exercise 	of monopoly 	power. 41
The 	economics 	literature 	has 	noted 	that 	bundling 	can 	be 	used
to 	reduce 	transaction 	and 	information 	costs. 	In addition 	to
41 	See 	Jefferson 	Parish 	Hospital 	District 	No. 	2 	v. 	Hyde, 	466
u.s. 	2, 	25 	(1984).
16

allowing 	the 	consumer 	to 	engage 	in 	"one-stop 	shopping", 	bundling
could be 	used 	by 	the 	seller 	for 	quality 	control 	purposes,42 	or 	to
lower 	the 	costs 	of 	distributing 	his 	product. 43
2. 	Bundling as 	an 	Efficient 	Promotional 	Device
Bundling 	is 	currently being used 	by 	the 	cellular 	carriers,
through 	their 	retailers 	and 	agents, 	to 	give 	introductory
discounts 	to 	new 	subscribers. 44 Based on 	our 	review 	of 	the
available 	economic 	literature that 	discusses 	introductory
discounts, 	we 	conclude 	that 	prohibiting bundling may 	cause 	the
42 See, 	~, 	Klein and Saft, 	supra note 13, 	and the discussion
in 	note 	37, 	supra.
43 The NPRM, 	supra 	note 	1, 	§11.6 	notes 	that 	"bundling 	reduces
the 	"transactions 	costs" 	of determining 	the 	individual 	consumer's
optimal commodity bundle, 	~, 	the seller rather than the consumer
performs 	the 	search 	for 	the 	optimal 	commodi ty 	bundle." 	For
example, 	selling a 	package can reduce the number of times a 	product
must 	be 	inspected 	prior 	to 	final 	sale, 	thus 	reducing 	information
costs. 	For 	a 	detailed 	explanation 	of 	how 	bundling 	eliminates
redundant 	expenditures 	on 	information, 	and 	for 	an 	application 	of
this 	theory 	to 	the 	distribution 	of diamonds 	and 	films, 	see 	Kenney
and 	Klein, 	"The 	Economics 	of 	Block 	Booking," 	26 	Journal 	of 	Law 	&
Economics 497-540 	(1983). 	See also Marvel 	and McCafferty, 	"Resale
Price 	Maintenance 	and 	Quality 	Certification," 	15 	RAND 	Journal 	of
Economics 	346-359 	(1984).
44 See, 	~, 	NPRM, 	suora 	note 	1, 	§ 	111.17 	and 	the 	ads
contained 	in 	the 	Comments 	of 	Southwestern 	Bell 	Mobile 	Systems «
Inc., 	In 	the 	Matter 	of 	Bundling 	of 	Cellular 	Customer 	Premises
Equipment in 	[sic] 	Cellular Service, 	CC Docket 91-34, 	May 20, 	1991,
Addendum 1. 	These ads 	show promotions that provide deep discounts
on 	CPE 	equipment 	as 	long 	as 	the 	purchaser 	also 	agrees 	to 	take
cellular 	service 	for 	a 	fixed 	time 	period 	(~, 	three 	months).
While 	the 	efficiency 	explanations 	of 	bundling 	offered 	in 	Part 	B.1
of this section, 	such as consumer preference for one stop shopping,
and 	lowered 	transactions 	costs 	are 	correct 	and 	can 	lower 	the 	cost
(and thus the price) 	of the bundle, 	they do not necessarily explain
why 	consumers 	must 	be 	offered 	a 	discount 	in 	order 	to 	take 	the
preferred 	bundle. 	For 	this 	reason, 	the 	discussion 	contained 	in
this 	Section 	focuses 	on 	the 	promotional 	pricing 	aspect 	of 	the
bundle.
17

cellular companies 	to 	replace 	these 	discounts 	with 	promotional
expenditures 	that 	are more 	costly 	and 	less 	likely 	to 	be 	directly
appropriated 	by 	the 	consumer.
Economic 	analysis 	suggests 	that 	introductory discounts 	can
be 	used 	by 	firms 	to 	signal 	to 	consumers 	that 	they have 	lower
marginal 	costs 45 or higher quality 	than 	alternative 	sellers. 46
For 	example, 	in 	the 	cost-signalling model~ 	consumers 	cannot
observe 	a 	firm's 	costs, 	and 	can 	observe 	a 	firm's 	future 	price
only 	after 	incurring 	a 	sunk cost 	in 	the 	current 	period. 47
Because 	a 	firm with 	lower 	costs will 	charge 	lower prices 	in 	the
future, 	consumers would 	prefer 	to 	commit 	to 	a 	firm 	with 	lower
costs. 	Consequently, 	a 	low-cost 	firm 	has 	an 	incentive 	to 	try 	to
distinguish 	itself 	from 	a 	high 	cost 	firm, 	because 	by 	doing 	so 	it
will 	benefit 	from 	the 	sales 	generated by 	this 	consumer
preference. 	Introductory discounts 	that 	are 	large 	enough 	to 	be
profitable 	for 	low-cost 	firms, 	but not high-cost 	firms, 	can
accomplish this. 	A similar explanation 	applies 	to 	the 	case 	of
high 	quality 	firms 	attempting 	to 	distinguish 	themselves 	from 	low
45 	See 	Bagwell, 	"Introductory 	Price 	as 	a 	Signal 	of 	Cost 	in 	a
Model 	of 	Repeat 	Business," 	54 	Review 	of 	Economic 	Studies 	365-384
(1987) •
46 See, 	~, 	Nelson, 	"Information and 	Consumer 	Behavior, II 	78
Journal 	of 	Political 	Economy 	533-547 	(1970), 	Shapiro, 	"0ptimal
Pricing of Experience Goods, II 	14 	Bell Journal 	of Economics 497-507
(1983), 	and Milgrom and Roberts, 	"Price and Advertising Signals of
Product Quality," 	94 	Journal 	of 	Political 	Economy 	796-822 	(1986).
47 For example, 	a 	cellular customer may incur carrier-specific
sunk 	costs 	that 	are 	tied 	to 	the 	specific 	number 	(~, 	business
cards 	or 	ads 	printed with 	a 	specific phone 	number).
18

quality 	firms. 	In 	either 	case, 	the 	economic 	literature 	has 	noted
that 	the 	use 	of 	introductory 	pricing 	can 	achieve 	the 	desired
differentiation 	at 	minimal 	cost. 48 In 	some 	circumstances,
promotional 	pricing may 	be 	the 	only way 	in which 	a 	firm 	with
lower 	overall 	costs 	can 	effectively compete. 49 Thus, 	to 	the
extent 	that 	promotional 	pricing 	is 	being used 	to 	signal 	low 	costs
or high 	quality, 	a 	ban 	on 	such promotions· would 	result 	in
cellular companies 	and 	their 	agents 	substituting away 	from 	direct
discounts 	to 	consumers 	toward 	promotions 	that 	are 	less 	likely 	to
be 	appropriated 	by 	the 	consumer 	(~, 	purely 	dissipative 	signals
such 	as 	advertising with 	no 	obvious 	informational 	content),60
thereby 	reducing 	total 	welfare.
contrary 	to 	the 	claims 	in 	some 	comments, 	these 	promotions 	do
not 	result 	in 	higher 	future 	prices, 	and do 	not 	result 	in 	current
cellular 	subscribers 	being 	forced 	to 	subsidize 	new 	subscribers'
48 ~ Milgrom 	and Roberts, 	supra 	note 	46, 	p. 	799.
49 	For 	an 	example, 	see 	Besen 	and 	Johnson, 	Compatibility
Standards, 	Competition, 	and 	Innovation 	in 	the 	Broadcasting
Industry, 	RAND Pub. 	No. 	R-3453-NSF 	(Nov 	1986), 	pp. 	26-28. 	In this
example, 	competition 	for 	a 	larger 	base 	of 	subscribers 	and 	the
potential 	for 	repeat 	sales 	cause 	competing 	firms 	(even 	the 	most
efficient 	firm) 	to 	set 	the 	initial 	price 	below 	cost.
60 	See 	Milgrom 	and 	Roberts, 	supra 	note 	46, 	p 	799. 	Shifting
promotional 	expenditures 	from 	direct 	payments 	to 	the 	consumer 	to
television advertising 	is 	likely to be more dissipative 	(i.e., 	the
consumer 	is 	likely 	to 	receive 	less 	utility 	from 	television
advertising than 	from a 	direct payment). 	For a 	general discussion
of 	dissipative 	versus 	non-dissipative 	promotions, 	see 	Klein 	and
Leffler, 	supra 	note 	37.
19

CPE 	purchases. 51 Once 	a 	customer 	agrees 	to 	purchase 	service 	from
a 	cellular 	carrier, 	any 	promotional 	expenditures 	become 	sunk
costs. 	Given 	that 	a 	profit maximizing 	firm will 	set 	service
rates 	based 	on 	the 	marginal 	cost 	(and 	not 	the 	average 	cost) 	of
providing 	service, 	and 	given 	that 	sunk 	costs 	do 	not 	directly
affect 	the 	marginal 	cost 	of 	providing 	service, 	service 	rates
charged will 	not 	systematically 	increase 	as 	promotional
expenditures 	increase. 	In 	fact, 	if 	a 	ban 	on 	promotions 	causes
consumers 	to 	commit 	to 	the 	high marginal 	cost 	firm, 	service 	rates
will 	be 	higher 	than under 	the 	regime where 	the 	promotions 	are
allowed 	to 	act 	as 	signals 	of 	low cost 	or high 	quality.
Because 	the provider 	of 	service must 	recover 	the 	cost 	of 	the
introductory discount 	(Which must 	be 	large 	enough 	to 	separate 	the
low 	from 	the 	high 	cost 	firms) 	over 	the 	life 	of 	the 	relationship,
he 	must 	prevent 	customers 	who 	have 	already 	received 	the 	discount
from 	obtaining 	another discount 	(~, 	he 	must 	limit 	the 	discount
to 	new 	subscribers). 	Since 	those 	customers 	interested 	in
purchasing 	the 	bundle 	are 	likely 	to 	be 	new 	subscribers, 	giving
the 	discount 	only 	to 	those who 	purchase 	the 	bundle 	is 	likely 	to
be 	a 	low cost 	and 	effective way 	to 	limit 	discounts 	to 	new
51 See, 	~, 	Comments 	of 	Cellnet Communications, 	Inc., 	supra
note 	17, 	p. 	13.
20

subscribers. 52
Similarly, 	since 	the 	purpose 	of 	the 	discount 	is 	to 	reduce
the 	price 	of 	cellular service, 	and 	not 	the price 	of 	phones, 	the
provider 	of 	service must 	prevent 	those 	just 	interested 	in 	phones
from 	purchasing 	a 	below-cost phone 	and 	immediately 	cancelling
service. 	This 	is 	achieved 	by 	bonding those 	customers who 	have
received 	the 	introductory 	discount 	to 	the' provider who 	gave 	the
discount 	(~, 	through minimum 	service 	requirements 	or
cancellation 	fees).
3. 	Bundling and 	Foreclosure 	of 	the 	CPE market
Traditionally, 	anticompetitive 	explanations 	of 	tying 	or
bundling have 	posited 	that 	these 	practices 	permit 	a 	monopolist 	in
one market 	(~, 	cellular 	service) 	to 	"leverage" 	his 	monopoly
into 	a 	second market 	(~, 	CPE) 	by 	foreclosing 	independent 	CPE
producers 	from 	access 	to 	its 	cellular customers. 	Indeed, 	the
protection 	of 	independent CPE 	producers 	(and 	not 	resellers) 	seems
to 	have 	been the 	focus 	of 	the 	FCC's 	antibundling 	rule. 58
The 	leverage 	theory has 	been 	criticized 	in 	the 	economics
literature. 	Intuitively, 	critics 	have 	noted 	that 	if a 	monopoly
seller 	of 	a 	good 	extracted 	all 	of 	the 	available monopoly 	profits
52 See 	Peterman, 	"The 	International 	Salt Case," 	22 	Journal 	of
Law 	& Economics 	351-364 	(1979). 	Peterman 	notes 	that 	the 	costs 	of
administering selective price reductions to reflect lower costs may
dictate whether it is in the first good's price 	(~, the cellular
service 	price) 	or 	the 	second 	good's 	price 	(~, 	the 	CPE 	price)
that 	the 	discount 	is 	reflected. 	See 	id., 	p. 	359, 	pp. 	362-363.
58
note 	40. See 	NPRM, 	supra 	note 	1, 	§ 	111.19 	and 	the 	discussion 	in
21

through 	the 	sale 	of 	this 	good, 	no 	additional 	monopoly 	profits
could be 	gained by 	forcing 	the 	consumer 'to purchase 	a 	second
good. 	In 	short, 	if 	the 	goods 	are 	demanded 	in 	fixed 	proportions,
only 	one monopoly profit 	can 	be 	extracted. 5'
Recent 	theoretical 	work has 	reexamined 	the 	leverage
theory. 55 	In 	this 	model, 	bundling may 	allow a 	monopolist 	in 	one
market profitably to 	deter 	the 	entry 	(or 	to 	induce 	the 	exit) 	of 	a
competitor 	in 	a 	second market with 	a 	duopoly 	structure. 56 The
additional 	profits 	from 	being a 	monopolist 	(rather than 	a
duopolist) 	in 	the 	second market, 	under 	carefully 	defined 	specific
conditions, 	can outweigh the 	sacrifice 	in monopoly 	profits 	from
pricing the 	first 	good at 	its 	(unbundled) 	profit-maximizing
5' See, 	~, 	Bork, 	The Antitrust Paradox, 	Basic Books 	(1978),
Posner, 	Anti trust 	Law: 	An 	Economic 	Perspective, 	uni versi ty 	of
chicago Press 	(197 6). 	These arguments hold where the two goods are
used in fixed proportions, 	(~, complementary goods such as bolts
and 	nuts). 	Under 	these 	conditions, 	bundling 	or 	tying 	cannot 	be
used 	for 	anticompetitive 	purposes, 	as 	an 	increase 	in 	the 	price 	of
one good will 	cause the amount the purchaser is willing to pay 	for
the 	second 	good 	to 	fall 	by 	the 	same 	amount. 	In 	the 	variable
proportions 	case, 	economic 	explanations 	of 	tying 	or bundling 	have
centered 	upon 	its 	use 	as 	a 	device 	to 	facilitate 	price
discrimination 	(see 	Part 	B.4 	of 	this 	section, 	infra) 	in 	addition
to 	its 	use 	as 	an 	efficient vertical 	contract 	(see ~, 	Blair and
Kaserman, 	"vertical 	Integration, 	Tying, 	and Antitrust 	Policy," 	68
American 	Economic 	Review 	397-402 	(1978).
55 	See 	Whinston, 	"Tying, 	Foreclosure, 	and 	Exclusion," 	80
American 	Economic 	Review 	837-859 	(1990).
56 The monopolist uses the bundle to reduce the residual demand
facing the competitor in the second market below the level at which
he "can 	produce 	profitably 	(Le., 	recover 	both 	his 	fixed 	and
variable 	costs). 	The 	competitor, 	anticipating 	negative 	profits,
is 	deterred 	from 	entering 	or 	induced 	to 	exit 	the 	second 	market.
Thus, 	this model 	is a 	variant of the entry deterrence models. 	See,
~, 	Dixit, 	"The 	Role 	of 	Investment 	in 	Entry 	Deterrence," 	90
Economic Journal 	95-106 	(1980).
22

level.
While 	the 	model 	indicates 	that 	use 	of 	bundling 	for 	these
purposes 	can be 	profitable, 	its 	author 	acknowledges 	that, 	by
itself, 	it does 	not 	provide 	a 	compelling 	case 	for 	per 	se 	bans 	on
bundling. 67 	Further, 	the 	conditions 	necessary 	to 	obtain 	an
anticompetitive 	outcome do 	not 	appear 	to 	exist 	in 	the 	cellular
market. 	First, 	it does 	not 	seem 	likely 	that 	individual 	cellular
companies 	possess market 	power vis 	a 	vis 	the 	national 	CPE
manufacturers. 68 In 	addition, 	the model 	requires 	that 	the 	second
67 	Whinston, 	supra 	note 	55, 	suggests 	that 	issues 	of 	policy
should 	be 	approached 	with 	caution. 	He 	notes 	that 	"[w]hile 	the
analysis 	vindicates 	the 	leverage 	hypothesis 	on 	a 	positive 	level,
its 	normative 	implications 	are 	less 	clear. 	Even 	in 	the 	simple
models 	considered 	here, 	which 	ignore 	a 	number 	of 	other 	possible
motivations 	for 	the 	practice, 	the 	impact 	of 	this 	exclusion 	on
welfare 	is 	uncertain. 	This 	fact, 	combined with 	the 	difficUlty 	of
sorting 	out 	the 	leverage-based 	instances 	of 	tying 	from 	other
practical 	cases, 	makes 	the 	specification 	of 	a 	practical 	legal
standard 	extremely difficult." 	To 	illustrate 	this 	point 	further,
one 	can 	note 	that 	the 	economics 	literature 	has 	produced 	a 	large
number 	of 	entry 	deterrence 	models. 	In 	these 	models, 	almost 	any
type 	of 	investment 	(~, 	plant 	capacity, 	R&D) 	can 	serve 	as 	an
investment 	in 	entry 	deterrence. 	However, 	it 	is 	seldom 	argued,
based 	on 	these 	theoretical 	arguments, 	that 	all 	such 	investments
should be 	banned.
68 While 	the 	cellular service companies may have market 	power
in a 	CGSA, 	(or in several CGSA's 	for mUltiple system operators) 	the
relevant 	geographic 	market 	for 	the 	sale 	of 	CPE 	equipment 	is 	at
least 	a 	national 	(and 	possibly 	a 	world) 	market. 	If 	individual
cellular service companies do not possess market power 	in the sale
of 	cellular 	service 	on 	a 	national 	level, 	it 	is 	unlikely 	that
foreclosure of the CPE market will be successful. 	According to the
CTIA, 	there 	were 	125 	facilities-based 	cellular 	systems 	operators
nationally 	at 	the 	end 	of 	1990. 	See 	Comments 	of 	the 	CTIA, 	supra
note 	15, 	P 	13. 	Under 	these 	conditions, 	a 	CPE 	manufacturer
foreclosed 	by 	one 	cellular service company 	from 	its 	CGSA's 	easily
could 	sell 	his 	equipment 	to 	other 	cellular companies 	operating 	in
many 	other 	CGSA's. 	The 	potential 	for 	the 	cellular 	service
companies to act as monopsonists does not seem to be a 	concern here
either. 	CPE seems to be elastically supplied, 	thus minimizing the
effects 	of 	any 	monopsony 	power. 	Moreover, 	allowing 	cellular
23

good 	(in 	this 	case, 	CPE) 	be produced with 	decreasing 	(and 	not
constant) 	costs. 	This 	assumption 	does 	not 	seem 	to 	hold 	for 	the
manufacture 	of 	CPE. 69 And 	in 	the 	case 	of 	complementary goods,
the 	model 	requires 	that 	only the 	bundle 	be 	sold.~ 	Such a
restriction would be 	explicitly prohibited by 	the 	FCC. 61 More
generally, 	this 	model 	is 	extremely 	sensitive 	to 	the 	assumptions
employed, 	and 	the 	"leveraging" 	outcome 	is' just 	one 	of many
. bl 	. I . b 	. 	t 	62	POSS1 	e 	equ1 	1 	r1um ou 	comes. 	Furthermore, 	even 	if 	bundling
were 	used 	to 	deter 	entry or 	to 	induce 	exit, 	the 	effects 	on 	total
welfare 	are 	ambiguous. 	In 	this 	model 	privately profitable
service 	companies 	to 	integrate 	vertically 	into 	CPE 	manufacturing
and 	sales 	will 	likely 	reduce 	any 	existing 	welfare 	losses 	from
monopsony. 	See,~, McGee 	and 	Basset, 	19 	"vertical 	Integration
Revisited," 	Journal 	of 	Law 	& 	Economics 	17-38 	(1976), 	and 	Perry,
"vertical 	Integration: 	The Monopsony 	Case," 	68 	American 	Economic
Review 	561-570 	(1978). 	Finally, 	there 	seems 	to 	be 	little 	danger
that the 	local 	cellular service companies would be able to extract
quasi-rents from the CPE manufacturers, 	as there seems to be little
or no 	costs 	of manufacturing and 	selling CPE 	that 	are 	specific 	to
any geographic market. 	Manufacture of CPE is national and not tied
to 	local 	markets, 	and 	CPE 	is 	sold 	on 	the 	retail 	level 	through
independent 	outlets 	that 	also 	sell 	other products 	(~, 	home 	and
car 	audio 	products).
69 See, 	~, 	NPRM, 	supra note 1, 	§ 	111.11, 	and the discussion
around 	note 	22, 	supra.
~ See Whinston, 	supra 	note 	55, 	p. 	850.
61 	Pure 	bundling would be 	prohibited 	as 	the 	cellular carriers
must 	make 	cellular 	service 	separately 	available 	at 	a 	uniform
wholesale 	price. 	See 	NPRM, 	section 	I, 	and 	footnote 	13, 	supra.
62 Whinston, 	supra 	note 	55, 	pp. 	855-856. 	See 	also Malueg 	and
Schwartz, 	"Preemptive Investment, 	Toehold Entry, 	and the Mimicking
Principle, 	22 	RAND 	Journal 	of 	Economics 	1-13 	(1991). 	They 	show
that 	the 	entry 	deterrence 	result 	can be 	weakened 	if 	there 	is more
than 	one 	potential 	entrant 	(in 	this 	case 	corresponding 	to 	the
existence 	of 	more 	than 	one 	CPE 	manufacturer) 	or 	if 	the 	model 	is
extended 	past 	two 	periods.
24

bundling 	can 	increase both 	total 	and 	consumer 	surplus. 63
Finally, 	per 	se bans 	on 	bundling 	are 	not 	necessary 	to 	discourage
anticompetitive 	outcomes 	from 	its 	use, 	as 	any 	such 	attempt 	to
monopolize 	the 	CPE market 	could 	be 	addressed with 	traditional
antitrust 	enforcement. M
In 	our view, 	the 	record 	in 	this 	proceeding does 	not 	support
the 	leverage 	theory. 	As 	noted 	above, 	the'majority 	of 	comments
opposing the 	tentative 	conclusions 	in 	the 	NPRM are 	from
resellers, 	not 	CPE manufacturers. 	If 	foreclosure 	of 	the 	CPE
market was 	the 	likely 	outcome 	of bundling, 	we 	would 	expect 	that
the 	independent 	CPE manufacturers, 	acting 	in 	their 	own 	self-
interest, 	would 	have 	submitted comments. 66
63 	See Whinston, 	supra 	note 	55, 	and 	note 	57, 	supra.
See 	also
Antitrust
§ 	I I I • 9 	and 	n . 	10 .
Rival's 	Costs," 	33
6" 	See 	NPRM, 	supra 	note 	1,
Brennan, 	"Understanding 	Raising
Bulletin 	95-113 	(1988).
66 Tandy, 	which manufactures CPE and retails them through Radio
Shack 	Stores 	filed 	a 	comment 	that 	opposed 	lifting 	the 	bundling
rule. 	See 	Comments 	of 	Tandy 	Corporation, 	In 	the 	Matter 	of
Bundling 	of 	Cellular 	Customer 	Premises 	Equipment 	and 	Cellular
Service, 	CC 	Docket 	91-34, 	May 	20, 	1991. 	However, 	Tandy 	did 	not
focus 	on 	the 	foreclosure 	of 	the 	CPE 	market 	in 	its 	comment. 	It
notes 	"the 	carriers' 	purpose 	in 	bundling 	is 	not 	to 	drive 	CPE
retailers 	from 	the 	market 	and 	then 	raise 	'its' 	CPE 	prices, 	even
though 	that 	may 	be 	an 	incidental 	result 	of 	their 	practices.
Instead, 	the carriers goal 	is to obtain market share in the service
market 	..... 	Id., 	p. 	9. 	Tandy 	suggests 	that 	these 	promotions
will 	keep 	the 	price 	of 	cellular service 	high 	in 	the 	long 	run, 	and
will 	result 	in 	the 	evasion 	of 	rate-of-return 	regulation. 	For 	a
statement 	of 	the 	reasons 	that 	promotions 	do 	not 	raise 	price, 	see
note 	51, 	supra. 	For 	a 	discussion 	of 	the 	cross 	subsidy 	to 	evade
regulation 	issue, 	see 	the 	discussion 	in 	Part 	B.5 	of 	this 	Section,
infra.
25

4. 	Price 	Discrimination
The 	economics 	literature has 	focused 	much 	attention 	on 	the
use 	of 	bundling 	as 	a 	price 	discrimination 	device. 	Two ways 	in
which 	bundling 	or tying 	can be 	used 	to 	price 	discriminate 	have
been 	identified 	in 	that 	literature. 	First, 	there 	is 	the
"metering" 	argument, 	whereby 	the 	tied good 	is 	priced 	above 	cost
to 	discriminate 	against 	heavy 	users 	of 	the 	tying good.~ 	In 	the
case 	of 	cellular 	service, 	this 	is 	not 	a 	viable 	option, 	since 	the
FCC mandates 	that 	service 	and 	CPE 	also be made 	available
separately. 67 	In 	addition, 	the 	cellular company has 	the 	ability
to 	meter 	through 	its 	ability 	to 	charge 	separately 	for 	airtime.
Thus, 	tying 	CPE 	to 	cellular 	service 	does 	not 	seem to 	be 	required
for 	metering. 68
Given 	these 	considerations, 	our 	analysis 	focuses 	on 	the
second 	use 	of 	bundling 	for 	price 	discrimination: 	the 	practice 	of
66 	See, 	~, 	Bowman, 	"Tying 	Arrangements 	and 	the 	Leverage
Problem," 	67 	Yale 	Law Journal, 	19 	(1957), 	pp. 	23-25. 	Bork, 	supra
note 	54, 	pp. 	376-377, 	notes 	that 	this 	"price 	discrimination
hypothesis 	fits 	the 	facts 	of 	the 	IBM 	case." 	See 	International
Business 	Machines. 	Inc. 	v. 	United 	States, 	243 	U.S. 	131 	(1936).
IBM 	required 	those 	who 	leased 	their 	tabulating 	machines 	also 	to
purchase 	the 	cards 	used 	in 	the 	machines. 	For 	a 	discussion 	of
alternative 	explanations 	for 	apparent 	cases 	of 	metering, 	see
Peterman, 	supra 	note 	52.
67 	See 	note 	13, 	supra.
68 	That 	is, 	cellular 	service 	companies 	are 	able 	to 	use 	a 	two
part 	tariff 	by 	charging 	a 	fixed 	monthly 	fee, 	and 	a 	per 	minute
charge 	to meter 	usage. 	For a 	discussion 	of 	two 	part 	tariffs, 	see
Oi, 	"A 	Disneyland 	Dilemma: 	Two 	Part 	Tariffs 	for 	a 	Mickey 	Mouse
Monopoly," 	85 	Quarterly Journal 	of 	Economics 	77-90 	(1971).
26

"block booking". 69 	Block booking 	allows 	the 	seller to 	extract
larger 	sums 	from 	the 	buyers 	than 	would 	be 	possible 	if 	the 	two
products 	were 	only 	sold 	separately. 	For 	example, 	suppose 	the
demands 	for 	two 	products 	in 	a 	bundle were 	such 	that 	any 	given
buyer placed a 	relatively high value 	on 	one, 	but 	not 	both, 	of 	the
products, 	so 	that 	the 	value 	of 	the 	bundle 	remained 	relatively
constant 	across 	buyers. 7o Under 	these 	circumstances, 	a 	constant
bundle 	price, 	set 	at 	the 	correct 	level, 	could 	extract more 	of 	the
available 	consumer 	surplus. 	If 	the 	two 	products 	in 	the 	bundle
were 	priced 	separately, 	and 	the 	monopolist 	could 	not 	discriminate
between 	low 	and high valued buyers 	for 	each 	product, 	he would
have 	to 	act 	as 	a 	single 	price monopoly. 	This would 	result 	in
some 	of 	the 	previously captured 	sums 	being turned 	into 	a
deadweight 	loss 	and 	some 	of 	the 	surplus 	being given 	to 	the
69 	See, 	~, 	Stigler, 	"A 	Note 	on 	Block 	Booking," 	in 	G.
Stigler, 	ed., 	The 	organization 	of 	Industry, 	Chicago 	(1968): 	165-
170. 	Block 	booking 	can 	be 	profitable 	with 	both 	pure 	bundling
(i.e., 	only the bundle 	is sold) 	or with mixed bundling 	(i.e., 	both
goods 	in the bundle also are available separately). 	See Adams and
Yellen, 	"Commodity 	Bundling 	and 	the 	Burden 	of 	Monopoly," 	90
Quarterly Journal 	of 	Economics 	475-498 	(1976).
70 In other words, 	the value of the products 	in the bundle are
not 	positively 	correlated. 	The 	cases 	of 	independent 	demands 	and
of 	negatively 	correlated 	demands 	have 	been 	the 	standard 	cases
studied 	in 	the 	literature. 	See 	Schmalensee, 	"Commodity 	Bundling
by 	a 	Single 	Product Monopolist, 	25 	Journal 	of 	Law 	& Economics 	67-
71 	(1982). 	However, 	bundling 	for 	price 	discrimination 	may 	be
useful with slightly correlated demand. 	It will not be viable with
strongly 	correlated 	demands. 	See 	McAfee, 	McMillan, 	and 	Whinston,
"Mul tiproduct 	Monopoly, 	Commodity 	Bundling, 	and 	Correlation 	of
Values," 	103 	Quarterly Journal 	of 	Economics 	371-383 	(1989).
27

buyers. 11
The 	economic 	literature 	on 	bundling has 	pointed 	out 	that 	it
is 	difficult 	to 	distinguish 	the 	use 	of 	bundling 	for 	price
discrimination 	from 	legitimate promotions 	and 	other 	efficient
vertical 	contracts. 72 	Consequently, 	we 	suggest 	that 	regulatory
interference with 	such 	practices be 	undertaken with 	caution. 7s
As 	mentioned 	above, 	a 	ban 	on 	such promotions 	or 	contracts 	can
reduce welfare. 	In 	addition, 	price discrimination 	can 	increase
welfare 	even 	if potential 	efficiency 	effects 	of 	bundling 	are
ignored. 74 	Thus, 	we 	do 	not 	find 	that 	the 	theoretical 	possibility
of 	price 	discrimination 	supports 	a 	per 	se ban 	on 	bundling,
particularly 	in 	light 	of 	the 	ability 	to 	address 	anticompetitive
11 	Stigler, 	supra 	note 	69, 	provided 	the 	following 	example.
In the example, 	there are two buyers, 	A and B, 	and two goods, 	X and
Y. 	Buyer 	A would 	pay 	$8,000 	for 	good 	X and 	$2,500 	for 	good 	Y.
Buyer 	B would 	pay 	$7,000 	for 	good 	X and 	$3,000 	for 	good 	Y. 	If
priced separately, 	the price of X and Y would be 	$7,000 	and $2,500
per buyer respectively. 	The total 	revenue 	is 	$19,000. 	with block
booking, 	a 	single price of $10,000 per buyer can be set, 	resulting
in 	revenues 	of 	$20,000.
72 	See 	Kenney 	and 	Klein, 	supra 	note 	43.
73 See 	the 	discussion 	surrounding 	note 	37, 	supra.
74 	See, 	~, 	Adams 	and 	Yellen, 	supra 	note 	69, 	p. 	498. 	They
note 	that 	"public 	pOlicy 	must 	take 	account 	of 	the 	fact 	that
prohibition 	of 	commodity 	bundling 	without 	more 	may 	increase 	the
burden 	of 	monopoly. 	This 	is 	consistent 	with 	the 	general 	theorem
of 	second 	best: 	when 	one 	distortion 	exists 	(~, 	monopoly),
elimination 	of 	the 	other 	distortions 	(~, 	bundling) 	may 	either
enhance 	or 	diminish 	social 	welfare. 	The 	implication 	is 	that
monopoly itself must be eliminated to achieve high levels of social
welfare." 	See 	also, 	Varian, 	"Price 	Discrimination 	and 	Social
Welfare," 	75 American Economic Review 870-875 	(1985), 	and Hausman
and MacKie-Mason, 	"Price Discrimination and Patent Policy," 19 RAND
Journal 	of 	Economics 	253-265 	(1988).
28

practices 	with 	conventional 	antitrust 	enforcement.
5. 	Cross 	Subsidy with 	Rate-of-Return 	Regulation
In 	addition 	to 	the 	anticompetitive 	effects 	examined 	above,
the 	potential 	for 	a 	monopolist 	subject 	to 	binding 	rate-of-return
regulation 	to use 	an 	unregulated 	product 	to 	"pad" 	its 	rate 	base
has 	been noted 	in 	the 	economic 	literature. 76 Such 	cross-
subsidization can 	lead 	to 	higher 	prices 	in 	the 	regulated market,
and 	inefficient production 	in 	the 	unregulated market.
It 	is 	not 	clear that 	such 	concerns 	provide 	a 	basis 	for
having 	an 	antibundling 	rule 	at 	the 	federal 	level. 	As 	noted 	in
the 	NPRM, 	cellular 	service 	is 	not 	regulated 	at 	the 	federal 	level,
and 	is 	largely 	unregulated 	at 	the 	state 	level. u In 	addition,
for 	those 	states 	with 	regulation, 	utilization 	of 	regulation 	based
on 	rate-of-return 	principles 	is 	not 	common. 77 If 	rate-of-return
principles 	are 	not 	being used, 	then 	the 	distortions 	from 	the
cross 	subsidy, 	which 	are 	caused by 	use 	of 	rate-of-return
regulation, 	will 	not 	be 	present. 	And 	even 	if 	some 	states 	employ
rate-of-return 	regulation, 	antibundling 	regulation 	at 	the 	federal
76 	See, 	~, 	Brennan, 	"Cross 	Subsidization 	and 	Cost
Misallocation 	by 	Regulated 	Monopolists," 	2 	Journal 	of 	Regulatory
Economics 	37-51 	(1990).
76 See NPRM, 	supra note 1, 	§ 	111.14, land Comments of the CTIA,
supra 	note 	15, 	Attachment 	D. 	According 	to 	the 	CTIA, 	26 	states 	and
the District of Columbia have no regulation at the state level, 	and
only 12 	states and 	Puerto Rico are 	regulated at both the wholesale
and 	retail 	level.
77 The 	NPRM, 	supra 	note 	1, 	§ 	111.14 	suggests 	that 	"it appears
that there are no tariffs which require cellular carriers to price
service 	according 	to 	rate-of-return principles."
29

level 	is 	not 	required. 	Such 	regulation 	can be 	limited 	to 	and
enforced by 	those 	states 	that 	choose 	to 	have 	rate-of-return
regulation. 78
V. 	Concluding Remarks
Our 	analysis 	of 	the 	existing 	economic 	literature, 	considered
in 	the 	context 	of 	the 	cellular 	industry, 	does 	not 	support 	a 	~
se 	ban 	on 	"bundling" 	by 	cellular 	carriers. 	Lifting 	of· such a 	ban
is 	unlikely 	to 	present 	an 	anticompetitive 	danger, 	and will 	allow
cellular 	carriers 	to pursue 	promotional 	and 	transaction-cost
efficiencies. 	Because 	cellular 	service 	firms 	possess 	some
measure 	of market 	power, 	economic 	theory does 	admit 	the
possibility that 	bundling 	could, 	under 	certain conditions, 	reduce
consumer welfare. 	However, 	the 	theoretical 	potential 	for
anticompetitive 	behavior 	does 	not 	provide 	a 	compelling 	basis 	for
a 	per ~ ban. 	If 	one were 	able 	to 	identify 	such 	outcomes
following 	the 	lifting 	of a 	ban 	on 	bundling, 	they 	could be 	subject
to 	a 	case-by-case 	review under 	the 	antitrust 	laws.
78 Cellular Service is largely an intrastate service. 	See NPRM,
supra 	note 	1, 	§ 	II. 4. 	For 	arguments 	in 	favor 	of 	regulatory
federalism, 	see NPRM, 	id., 	§ 	III.21, 	and Comments 	of the 	People of
the 	state 	of 	California, 	supra 	note 	17.
30