Stick versus Carrot: Comparing

Structural Antitrust and Behavioral

Regulation Outcomes

Sumit K. Majumdar
University of Texas at Dallas
majumdar@utdallas.edu

April 15, 2021

Comments from Nishant Kathuria, Mike Peng, David Sappington and Dennis Weisman are
gratefully acknowledged.

1
 Stick versus Carrot: Comparing
Structural Antitrust and Behavioral
Regulation Outcomes

Abstract

Debate continues on whether either structural competition policy or antitrust remedies or

behavioral regulatory remedies should be used to implement institutional mandates. A set of
extensively used historical data for an entire population of firms for a fourteen-year period has
been used for cliometric analyses, in a natural experiment format, to evaluate the impacts of both
(a) structural antitrust policy and (b) behavioral regulation, for (i) exactly the same efficiency
outcome, (ii) for the same firms, and (iii) at the same time. The two remedies are compared vis-
à-vis each other to assess the economic performance outcome variations between the structural
and behavioral approaches. The results indicate that the stick has been less effective than the
carrot. Implementation of regulations have had a significantly larger economic impact relative to
the implementation of structural competition policy remedies on firm efficiency. Thus, a
standard behavioral regulatory approach has significantly out-performed antitrust remedies, that
have also been applied, in enhancing affected firms’ efficiencies. Fiscally, annual incremental
gains from the regulatory approach over that of the antitrust approach has been over $2 billion.
Structural remedies would yield one-shot short-term outcomes. Behavioral remedies have been
better in generating sustainable efficiencies. Behavioral regulation design, implementation and
outcome assessments could be based on dynamic evolutionary processes within a framework of
managed regulation. Given the clamor for actions against technology companies, including the
structural separations possibility, facts suggest that behavioral regulation approaches could be
apposite in controlling possible unacceptable firm behaviors, while calling into question efficacy
of antitrust remedy. To apply behavioral approaches, a managed regulation framework is
described in the article.

Key words: antitrust; regulation; behavioral remedies; dynamic efficiency; incentives; managed
regulation; mechanism design; natural experiments; stick and carrot; structural remedies.

2
1. Introduction

Antitrust issues in America’s economy have invited sizeable attention. 1 Many have noted

the contemporary dysfunctional consequences of monopolization in America. 2 Relatedly, many 3

have called for strict regulation of technology giants, such as Google, Facebook, Amazon, Apple

and Microsoft, among others, for presumed anti-competitive acts. Antitrust is thought to have

failed, 4 and laxity in enforcement is presumed to have set in, 5 with just a few individuals and

businesses materially benefiting at the expense of the many. 6 Thus, the clamor for rigorous

institutional involvement and enforcement is substantial.

1
Diana L. Moss, Breaking Up is Hard to Do: The Implications of Restructuring and Regulating
Digital Technology Markets, October Antitrust Source 1 (2019).
2
Thomas Philippon, THE GREAT REVERSAL: HOW AMERICA GAVE UP ON FREE
MARKETS (2019); Sumit K. Majumdar, The Bigness Complex Redux: Horizontal Ownership
Concentration and Efficiency Conundrums, 65 Antitrust Bull. 628 (2020)
3
Competition Policy International, US: Companies plead for Congress to regulate Apple,
Amazon, Facebook and Google, January 19 (2020),
(https://www.competitionpolicyinternational.com/us-companies-plead-for-congress-to-regulate-
apple-amazon-facebook-and-
google/?utm_source=CPI+Subscribers&utm_campaign=a6987a6f83-
EMAIL_CAMPAIGN_2020_01_25_06_27&utm_medium=email&utm_term=0_0ea61134a5-
a6987a6f83-237067643; Lina Khan, The Separation of Platforms and Commerce, 119 Columbia
Law Rev. 973 (2019).
4
Carl T. Bogus, The New Road to Serfdom: The Curse of Bigness and the Failure of Antitrust,
49 U. Mi. J. Law Reform 1 (2015).
5
Carl Shapiro, Protecting Competition in the American Economy: Merger Control, Tech
Titans, Labor Markets, 33 J. Econ. Persp. 69 (2019).
6
Maurice E. Stucke & Ariel Ezrachi, The Rise, Fall, and Rebirth of the U.S. Antitrust Movement,
December 15th Harvard Bus. Rev. (2017).

3
 Two complementary approaches exist. The first approach is structural, anchored on

antitrust. This is the ‘stick.’ The second approach is behavior regulation, 7 anchored on regulatory

policies. This is the ‘carrot.’ The concern is highly salient. Material concerns have been raised as

to the presumed anti-competitive behavior of digital firms, and a need for formal remedies has

been verbalized. 8 The need to control firms and make them answerable is palpable. 9 Thus,

whether to police and control at all or not is hardly an issue. An assessment of presumed anti-

competitive behavior has led to suggestions involving enforcement of structural separations as

sanctions. 10 The issue is whether to use a structural or a behavioral approach in remedy design.

The question of which approach, the structural or the behavioral, generates relatively better

performance is unexplored, and this article presents evidence as to which remedy is better.

A. The Crying Need and a Confusing Controversy

A need for re-balancing antitrust versus regulatory approaches has been recognized, 11 but

there is misperception on how to achieve re-balancing. 12 The debate is extensive and otiose, but

7
John A. Kay & John S. Vickers, (1990): Regulatory Reform: An Appraisal, in 223
DEREGULATION OR RE-REGULATION (Giandomenico Majone, ed., 1990).
8
Joseph A. Farrell & Philip J. Weiser, Modularity, Vertical Integration, and Open Access
Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age, 17 Harvard J.
Law & Tech. 85 (2003); Howard Shelanski & J. Gregory Sidak, Antitrust Divestiture in Network
Industries, 68 U Chicago Law Rev. 1 (2001); U. S. House of Representatives, Subcommittee on
Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, Investigation
of Competition in Digital Markets (2020) [hereinafter Competition in Digital Markets].
9
Kelly Fayne & Gabrielle Kohlmeier, Editor's Note: "No Question of More Pressing
Importance?" 82 Antitrust L. J. 763(2019).
10
Competition in Digital Markets, supra note 8.
11
Howard Shelanski, The Case for Rebalancing Antitrust and Regulation, 109 Mich. L. J. 683
(2011).

4
facts are non-existent 13 as to whether the structural or behavioral approach is more effective

when applied. 14 Absent empirical testing, involving the weighing of each type of remedy’s

merits, debates are inchoate.

A set of views posit that competition, as an outcome of the structural approach, is always

superior for governing the economy. 15 Another view, popularized by an economist whose

original work dealt with antitrust problems, and solution generation for handling these, however,

describes the endemic cases of market failure arising as due to firms’ pre-conceived egregious

behaviors. 16 These outcomes call for extensive regulatory remedies controlling firms’ behavior.

The remedies suggested, to make a market competitive via structural means and control

anticompetitive activities, are thought unnecessary; this is because the self-equilibrating nature of

12
Howard Shelanski, Antitrust and Deregulation, 127 Yale L. J. 1922 (2018).
13
Three studies, by Tomaso Duso, Klaus Gugler & Burcin Yurtoglu, How Effective is European
Merger Control? 55 Eur. Econ. Rev. 980 (2011), John E. Kwoka, Does Merger Control Work? A
Retrospective on U.S. Enforcement Actions and Merger Outcomes, 78 Antitrust L. J. 619 (2013)
and John E. Kwoka, CONTROLLING MERGERS AND MARKET POWER: A PROGRAM
FOR REVIVING ANTITRUST IN AMERICA (2020), have concluded that both structural and
behavioral remedies are, at best, only partially effective.
14
Hal R. Varian, Recent Trends in Concentration, Competition and Entry, 82 Antitrust L. J. 807
(2019).
15
William E. Kovacic & Carl Shapiro, Antitrust Policy: A Century of Economic and Legal
Thinking, 14 J. Econ. Persp. 43 (2000).
16
Williamson, Economies as an Antitrust Defense: The Welfare Trade-Offs, 58 Amer. Econ.
Rev. 18 (1968); Oliver E. Williamson, MARKETS AND HIERARCHIES: ANALYSIS AND
ANTITRUST IMPLICATIONS (1975); Oliver E. Williamson, Economies as an Antitrust
Defense Revisited, 125 U. Pa. L. Rev. 699 (1977); Oliver E. Williamson, THE ECONOMIC
INSTITUTIONS OF CAPITALISM (1985).

5
markets will provide disciplinary inducements for firms to behave aptly. 17 Another view, is that

deterrence inducements of structural measures result in changes in markets and industry

environments, promoting pro-competitive behavior. 18 Comparative evidence is clearly required.

B. Analysis Scope

The evidence presented is based on evaluating an efficiency outcome from the

simultaneous applications of both antitrust (structural) and regulatory (behavioral) remedial

approaches in the local operating segment of the United States telecommunications industry. The

evidence is generated for exactly the same firms, in that sector, for exactly the same years. The

study compares concurrent applying of structural (stick) versus behavioral (carrot) remedies.

Availability of data [i] on new competitor entry permitted by antitrust authorities, [ii] on

the varieties of different price regulatory mechanisms used by sector-specific institutional

agencies, and [iii] on firms’ efficiencies, permits comparative research design. One can gauge if

the antitrust (structural) or regulatory (behavioral) approach has been more effective in

generating productive efficiency outcomes.

C. Natural Experiment Design Summary

Three natural experiments are assessed, using an efficiency variable as an indicator of

economic performance. Natural experiment # 1 relates to how imposing a DOJ-led structural

17
Robert W. Crandall & Clifford Winston, Does Antitrust Policy Improve Consumer Welfare?
Assessing the Evidence, 17 J. Econ. Persp. 3 (2003).
18
Jonathan B. Baker, Responding to Developments in Economics and the Courts: Entry in the
Merger Guidelines, 71 Antitrust L. J. 189 (2003); Diana L. Moss, Merger Policy and Rising
Concentration: An Active Agenda for Antitrust Enforcement, 33 Antitrust, 69 (2018); Gregory J.
Werden, The Effect of Antitrust Policy on Consumer Welfare: What Crandall and Winston
Overlook, Washington, DC: Department of Justice, Antitrust Division, Economic Analysis
Group, Discussion Paper EAG 03-2 (2003).

6
antitrust remedy has impacted firms’ efficiencies. 19 Natural experiment # 2 relates to how

enforcing a FCC-led behavioral regulatory remedy has impacted firms’ efficiencies, using

exactly the same performance variable. 20 Natural experiment # 3 relates to whether structural

(antitrust) remedy efficiency outcomes have been better or worse, relative to behavioral

(regulatory) remedy outcomes, for the performance variable.

D. Article Structure

The article unfolds in seven further parts:

• The next section (2) highlights the conceptual framework to be applied in discussing

variations between the structural (antitrust) remedy and the behavioral (regulatory) remedy,

gives an overview of the context and provides details of the natural experiments.

• In section 3, exact details of sector-specific arrangements, with respect to structural policy

applied and behavioral regulations implemented, are provided.

• Section 4 contains details of the actual empirical work.

• Section 5 contains a comparative assessment of the results of the structural (antitrust) remedy

versus the behavioral (regulatory) remedy.

• Section 6 contains an interpretation of the evidence.

• Section 7 contains a discussion of the impact of the different types of remedies, commentary

on current debates about applying structural separations policies to counter anti-competitive

19
Sumit K. Majumdar, Strategic Responses to Entry in Communications Markets: Evaluating
Financial Consequences for Incumbents, 64 Antitrust Bull. 214 (2019).
20
Sumit K. Majumdar, Incentive Compatible Mechanism Design and Firm Growth: Experiences
from Telecommunications Sector Regulation, 81 Ann. Publ. & Coop. Econ. 357 (2010).

7
 behaviors, and proposes a managed regulation framework as the way ahead to implement

institutional controls over contemporary firm conduct.

• Section 8 concludes the article.

2. Conceptual Framework, Context and Natural Experiment Details

A. Nomenclature Use Note

While topical writing is prolix, literature terms are confusing. Hence, nomenclature

definition is needed. In this article, antitrust or competition policy arrangements are specifically

termed as structural remedies. Confusion can arise, as antitrust arrangements also affect the

conduct of firms and cause changes in their behavior. 21 Confusion can further arise, as antitrust

arrangements are often classified as structural regulations.

For the article, regulatory arrangements that control the conduct of firms, in a market

environment, are specifically termed as behavioral remedies. There is extensive use of the term

behavioral to address idiosyncratic issues across areas of antitrust, law and economics, and

regulation. 22 In this article, the word behavioral has not been used along these alternate lines.

21
Frederick M. Scherer & David Ross, INDUSTRIAL MARKET STRUCTURE AND
ECONOMIC PERFORMANCE (1990); William G. Shepherd, THE ECONOMICS OF
INDUSTRIAL ORGANIZATION (1979); William G. Shepherd, On the Core Concepts of
Industrial Economics, in 23 MAINSTREAMS IN INDUSTRIAL ORGANIZATION (Henry W.
De Jong & William G. Shepherd, eds., 1986).
22
Christine Jolls, Cass R. Sunstein & Richard H. Thaler, A Behavioral Approach to Law and
Economics, 50 Stanford L. Rev. 1471 (1998); Russell Korobkin & Thomas S. Ulen, Law and
Behavioral Science: Removing the Rationality Assumption from Law and Economics, 88 Cal. L.
Rev. 1051 (2000). William E. Kovacic & John C. Cooper, Behavioral Economics and Its
Meaning for Antitrust Agency Decision Making, 8 J. L., Econ. & Pol. 779 (2012); Joshua D.
Wright & Douglas H. Ginsburg, Behavioral Law and Economics: Its Origins, Fatal Flaws, and
Implications for Liberty, 106 Northwestern U. L. Rev. 1033 (2012).

8
Rather, the word behavioral explicitly refers to firms’ activity processes that business regulations

engender by the application of the specific mandated institutional remedies.

B. Structural ‘Stick’ and Behavioral ‘Carrot’ Approach Contours

Structural policies work by: [a] placing institutional restrictions on entry, exit and

mergers; [b] the delineation of which firms can engage in the supply of products and services to

particular customers; [c] placing limits on the number of firms operating at any one time; and [d]

restructuring the number of firms or the businesses of firms by having activities carried out by an

organization now separated into different entities. The fourth approach [d] is called structural

separation, and it is currently an extremely contentious issue.

Via structural policies, agencies such as the Department of Justice (DOJ) set restrictions

or alterations on the quantum of goods and services supplied. Structural policy use is a non-

interventionist and, ostensibly, laissez-fare approach to regulation. 23 Generally, structural

policies are enforced by antitrust agencies. These agencies are law enforcement bodies, engaging

in ex-post law enforcement after unacceptable behavior or outcomes may have already occurred.

Such agencies use the stick. Behavioral regulations are applied by regulatory agencies, which are

institutional entities that are long-term sectoral development bodies, engaging in ex-ante sector

growth enhancement. Such agencies use the carrot. The ex-post versus ex-ante agency

characteristics are important.

By using directives with respect to price controls, product labeling, advertising, quality

standards, human capital standards, technology investments, and sharing of facilities, regulators,

such as the Federal Communications Commission (FCC) in the United States, control firms

23
Daniel A. Crane, Antitrust’s Unconventional Politics, Summer Regulation 18 (2018); Ken
Heyer, Optimal Remedies for Anticompetitive Mergers, 26 Antitrust 26 (2012).

9
operations and market processes. Specific aspects of operating functions inherent in producing

and consuming goods and services are regulated. Commonly, behavioral regulation is considered

interventionist micro-management of economic activity. 24

The preferred mode of arranging institutional activity mode is structural, using antitrust

remedies. 25 Business institutional control ought to be minimally episodic and non-interventionist.

Structural remedies are one-off stick use. The structural mode changes industry composition by

permitting new competitor entry. In many cases, structural regulation alters an existing firm’s

boundaries by having it give up, via divestiture or disposal, existing activities or businesses. This

is the structural separation approach. This mode of remedy has been applied to several situations,

where remedies were needed. It remains the remedy of choice if conditions dictate seeking

amelioration of unwelcome circumstances. 26

Conversely, behavioral regulation involves applying consistent and continuous

mandatory operating rules for conduct of a firm’s activities. Behavioral regulation is a repetitive

and on-going process of institutional enforcement involving multiple interactions with affected

firms. This involves the continuous dangling of a carrot. Making behavioral regulation less

24
Crane, ibid.
25
Kwoka, supra note 13; Moss, supra note 18.
26
Khan, supra note 3; Articulated with reference to merger remedies, the primary antitrust
enforcement policy guide had stated a preference for structural remedies. Reasons were benefits
of speed, certainty, cost and efficacy. The Justice Department stated that: “A conduct remedy, on
the other hand, typically is more difficult to craft, more cumbersome and costly to administer,
and easier than a structural remedy to circumvent.” See Department of Justice (2004): Antitrust
Division Policy Guide to Merger Remedies, Washington DC: Antitrust Division (2004), at 8.

10
preferred, however, have been issues such as regulatory capture likelihood, 27 the difficulties

involved in specifying mandatory rules, the constraints arising in providing close checking, and

effectively engendering the continuous reporting of outcomes. 28

The Justice Department’s position paper on remedies had stated: “Conduct remedies can

be an effective method for dealing with competition concerns.” 29 Current stance on behavioral

remedies seems to contrast with such older previous policy, though. The Justice Department’s

then Assistant Attorney General for Antitrust had noted a need to minimize regulatory

interventions on issues of price, quality, and investment. 30 Hence, the relatively recently

27
The regulatory capture idea had been articulated more than six decades ago. See Marver H.
Bernstein, REGULATING BUSINESS BY INDEPENDENT COMMISSION (1955) and Sam
Peltzman, The Economic Theory of Regulation after a Decade of Deregulation, Brookings Pap.
Econ. Activity: Microecon. 1 (1989); the important pieces in this genre are by Gary Becker, A
Theory of Competition among Pressure Groups for Political Influence, 98 Q. J. Econ. 98, 371
(1983); Sam Peltzman, Toward a More General Theory of Regulation, 19 J. Law & Econ. 211
(1976); Richard A. Posner, Theories of Economic Regulation, 5 Bell J. Econ. & Man. Sc. 335
(1974); George J. Stigler, The Theory of Economic Regulation, 2 Bell J. Econ. 3 (1971); David
E. M. Sappington & Dennis L. Weisman, Regulating Regulators in Transitionally Competitive
Markets, 41 J. Reg. Econ. 19 (2012).
28
John E. Kwoka & Diana L. Moss, Behavioral Merger Remedies: Evaluation and Implications
for Antitrust Enforcement, 57 Antitrust Bull. 979 (2012).
29
Department of Justice, Antitrust Division Policy Guide to Merger Remedies, Washington DC:
Antitrust Division (2011) at 12.
30
Department of Justice, Justice News: Assistant Attorney General Makan Delrahim Delivers
Keynote Address at American Bar Association's Antitrust Fall Forum, Thursday, November 16,
2017, Washington DC: Office of Public Affairs, (2017) [https://www.justice.gov-opa-speech-
assistant-attorney-general-makan-delrahim-delivers-keynote-address-american-bar; accessed
August 26, 2018].

11
preferred approach of the DOJ Division has been design and enforcement of market structure-

alteration policies to enhance competitiveness. 31

C. Structural and Behavioral Approach Conceptual Distinctions

I further highlight key distinctions between structural and behavioral approaches. The

highlighted differences are of conceptual elements. Structural regulation relates to market

structure control by antitrust or competition policy agencies. The approach controls market

macro-characteristics. 32 Behavioral regulation controls firms’ and consumers’ conduct by sector-

specific agencies. 33 The behavioral or conduct approach regulates firms’ and markets’ micro-

characteristics.

Table 1 lists differences between the two types across eight dimensions. These are: (A)

the nature of institutional remedy; (B) the ethos of the agency in question; (C) the characteristic

of operating environment affected by the remedy; (D) the outcome that is impacted by the

remedy; (E) the frequency of application of the remedy; (F) the range of firms’ actions affected

by the remedy; (G) the explicit business activities affected by the remedy; (H) the typical

business decisions affected; and (I) the types and sizes of expenditures affected.

31
Relating to the Microsoft events of some time ago, Kovacic & Shapiro, supra note 15 at 49,
noted that: “Some prominent free market economists today are again arguing that antitrust
enforcement, as exemplified by the Justice Department’s case against Microsoft, is superior to
more intrusive regulation of high technology markets. Orrin Hatch, Chairman of the Senate
Judiciary Committee, has explicitly supported antitrust action against Microsoft in preference to
regulation in the form of the “Internet Commerce Commission.””
32
Manley Irwin & William H. Barrett, Antitrust Enforcement in the United States: Market
Structure versus Market Conduct, 1 Wash. U. Law Quar. 37 (1974).
33
Maurice E. Stucke, Behavioral Economics at the Gate: Antitrust in the Twenty-First Century,
38 Loyola U. Chi. L. J. 513 (2007).

12
 I deal with each in turn. As to the nature of the institutional arrangement and remedy

(dimension [A]), as already explained, an antitrust outcome is a structural remedy, while a

regulatory outcome involves a behavioral remedy.

As to the ethos of the institutional agencies involved (dimension [B]), an antitrust

outcome is a law enforcement sanction, orchestrated by an economic activity policing agency

that engages in criminal investigation and punishment. Conversely, a regulatory remedy is a

policy implementation activity by a sector development and coordinating agency that takes a

long-term of the evolution, economic performance and growth of the sector.

As to the characteristic of the operating environment, of firms, affected by the type of

remedy (dimension [C]), an antitrust remedy affects firms’ industries’ and markets’ macro

characteristics, while a regulatory remedy affects firms’ internal micro characteristics and the

micro characteristics of firms’ markets.

As to the key outcome generated (dimension [D]), an antitrust remedy affects the

structure of industries and markets. A behavioral regulatory remedy affects firms’ conduct within

a market and industry structure that may have been changed by an antitrust remedy.

As to the next aspect (dimension [E]), an antitrust remedy is a one-shot application, while

a behavioral regulatory remedy is ongoing and affects firms’ continuous conduct.

The variations listed above are widely known. 34 I highlight further differences between

antitrust and regulatory arrangements not discussed in the literature.

The range of firm actions affected by a particular type of remedy, (dimension [F]) is as

follows: an antitrust remedy affects the strategic actions of a firm in positioning itself in a given

industry segment, the actions taken in evolving the scale of the firm, and firms’ decisions in

34
Kwoka & Moss, supra note 28.
13
defining the scope of its activities in a market segment. Comparatively, a regulatory remedy

affects firms’ operational behaviors in implementing tasks within an industry and market

segment to generate performance outcomes.

Of the explicit business activities affected by the specific remedy (dimension [G]), an

antitrust remedy influences the choices of what and where, or more explicitly what not to do or

where not do it, as is often the case, of firms’ activities. A regulatory remedy affects firms’

choice of how and when to undertake those activities.

As to business decisions affected (dimension [H]), entry, exit, expansion, divestment,

integration and diversifications choices are influenced by antitrust remedies; conversely, pricing,

wages, quality, innovation and investment choices are influenced by regulatory remedies.

As to expenditure quanta, antitrust remedies affect large value one-off incurrences of

spending, while regulatory remedies affect smaller value, regularly incurred, operating expenses

(dimension [I]).

Summing up thoughts, structural antitrust remedies affect firms’ past entrepreneurial

actions; these actions have been anchored in calculated strategic decision-making which are then

affected by the structural remedies.

Conversely, behavioral regulation remedies affect firms’ managerial activities; these

activities arise from executive operational decision-making in firms which are then affected by

the behavioral remedies.

Firms, in general, loath both varieties of the institutional mechanisms. Yet, in an

imperfect world both antitrust (structural) and regulatory (behavioral) remedies may be

necessary to control firms’ actions and behavior, and generate the proper outcomes.

14
 Which approach, structural or behavioral, is the lesser of the two evils is a core concern.

The choice of a structural (antitrust) or behavioral (regulatory) remedy has to be fact based.

D. Context and Assessment

Context description is germane. 35 Broadly, over decades, the economic environment has

evolved alongside three different temporal institutional forms. The first temporal form has been

regulated competition, classified by Louis Brandeis as emerging in the 1920s. 36 The second

temporal phase has been a framework of arrangements classified as managed competition,

emerging in the 1990s. 37 A third temporal type to have emerged is managed regulation.

A unique range of institutional experiments has been conducted in the United States

telecommunications industry. Many simultaneous structural and behavioral regulatory events

occurred. 38 The evaluations carried out in this study have been:

• Experiment 1: using the relative entry of new competitors in the territory of each

incumbent local exchange carrier (ILEC), as a measure of market structural change, the

impact of structural remedies is assessed with respect to an efficiency measure.

• Experiment 2: using details of the transition from rate of return (ROR) method to the

price cap (PCR) method of consumer price control, as an indicator of change in the

35
Robert W Hahn & Paul C. Tetlock, Has Economic Analysis Improved Regulatory Decisions?
22 J. Econ. Persp. 67 (2008).
36
Crane, supra note 23.
37
J. Gregory Sidak & Daniel F. Spulber, Deregulation and Managed Competition in Network
Industries, 15 Yale J. Reg. 117 (1998).
38
As commented by an antitrust scholar, see William E. Kovacic, Using Ex Post Evaluations to
Improve the Performance of Competition Policy Authorities, 31 J. Corp. L. 503 (2006),
comparative and detailed evidence such as those presented in this article, while difficult to obtain
because of data limitations, ought to inform views about institutional agencies’ future approaches
15
 behavioral regulation method, the impact of behavioral remedy on the same measure of

ILECs’ efficiency is assessed.

• Experiment 3: ILECs’ efficiency outcomes, as simultaneously affected by both the

relative entry of new competitors (structural remedy) and the transition from ROR to the

PCR method (behavioral remedy), are then compared with each other, to gauge which

remedy outperforms the other.

The analyses are conducted using a balanced panel of much-deployed 39 data for forty-one

of the ILECs, the entire population of such firms, based on a compilation of firm-level facts for

ILECs, for the years 1988 to 2001. 40 An advantage is that like-by-like units are compared, as all

ILECs had similar operating exigencies. The next part details specific sectoral arrangements.

3. Sector-Specific Arrangements

A. Sector Structural Policy 41

In the 1990s, Congress codified the AT&T litigation settlement restrictions into

legislation, while opening local exchange markets for competition and providing ILECs’ owners

39
Majumdar, supra note 2, supra note 19, supra note 20; Sumit K. Majumdar, Debt and
Communications Technology Diffusion: Retrospective Evidence, 45 Res. Pol. 458 (2016); Sumit
K. Majumdar, Rabih Moussawi & Ulku Yaylacicegi, Mergers and Wages in Digital Networks: A
Public Interest Perspective, 19 J. Indus., Comp. & Trade 583 (2019) and Sumit K. Majumdar,
Rabih Moussawi & Ulku Yaylacicegi, Mergers Motives and Technology Deployment: A
Retrospective Evaluation, 65 Antitrust Bull. 120 (2020).
40
Data are obtained from the Statistics of Communications Common Carriers (SCCC), from the
Federal-State Joint Board Monitoring Reports, FCC reports on Competition in the
Telecommunications Industry, and National Regulatory Research Institute (NRRI) reports. These
data have been extensively used; see Majumdar, supra note 19. Institutional details are taken
from work; see Majumdar, supra note 2.
41
These are reproduced from prior work. See Majumdar, supra note 19, for latest work.

16
the ability to enter into long-distance markets. 42 This legislation became the Telecommunications

Act 1996 (TA 1996). 43 It was a structural regulation episode. This regulation removed barriers to

entry into ILECs’ territories, allowing new entrants the freedom to do business in once-closed

market domains, and allowed ILECs to compete in other markets, as it was thought that their

behavior would not be anti-competitive. 44

After 1996, each ILEC experienced new competitor entry into hitherto-monopolized

territory. These entrants were new firms, many entering the sector de-novo. A further instance of

structural regulation impact has been inter-modal competition. Thus, competitive entry from

large and experienced network infrastructure operators, that had the scale and capabilities

equivalent to or greater than that of the ILECs, 45 could alter the structure of competition in

ILECs’ markets. Hence, evidence generation enables assessment of the antitrust structural

natural experiment as to whether it impacted firms’ efficiencies.

42
See Majumdar, supra note 2, for details. In the 1990s, structural regulation made local
telecommunications markets competitive and affected specific firms differently. The
modification of final judgment (MFJ) leading to the consent decree, in the 1980s, and the
subsequent court-ordered 1984 divestiture of then monopolist AT&T’s local exchange business
into seven regional holding companies (RHCs), each owning several incumbent local exchange
carriers (ILECs), has been the largest-ever structural regulation episode, transforming the
industry. After the issue of the MFJ in 1982, and pursuant to the consent decree, in 1984 AT&T
(the owner of the Bell system) divested its ILECs (called the Bell Operating Companies [BOCs])
and retained long distance services. In 1984, 22 BOCs owned by seven RHCs were in existence,
and 161 local access and transport areas (LATAs) were created. The BOCs were permitted to
carry calls originating and terminating in one LATA.
43
Telecommunications Act of 1996 (Public Law 104-104, 110 Stat. 56, codified at 47 U.S.C.
151, et seq.).
44
William F. Shugart, Sibling Rivalry: The Emergence of Competition among the Baby Bells, 16
Man. & Dec. Econ. 479 (1995).
45
David G. Loomis & Christoper M. Swann (2005): Inter-modal Competition in Local Exchange
Markets, 17 Info. Econ. & Pol. 97 (2005).

17
B. Sector Behavioral Regulation 46

In the same period, a series of behavioral regulation events, over firms’ pricing behavior,

affected the firms. The availability of these facts enables a test of the behavior regulation natural

experiment as to whether it had positive impact. The impact of the structural remedy vis-à-vis the

behavioral regulation remedy can be evaluated as an outcome of a larger natural experiment of

differences in approaches in two varying institutional perspectives.

The sector has experienced consistent regulation and control of its strategic behavior

related to consumer prices. In the sector, there have been two polar extremes of such regulation.

At one end, the old approach has been rate of return (ROR) based pricing regulation. In this

approach, firms have been allowed to set prices allowing them to earn a pre-determined return on

their capital base. At the other end, price cap regulation (PCR) has become the standard for

keeping control over firms’ prices in oligopolistic or monopolistic settings. 47 In a PCR

mechanism, prices are capped for a fixed period, before next outcome reviews. 48 Periodic price

increases have been allowed for exogenous inflationary effects, taking into account any

productivity gains made.

46
These are reproduced from other work. See Majumdar, supra note 19.
47
Mark Armstrong & David E. M. Sappington, Recent Developments in the Theory of
Regulation, in 1557 HANDBOOK OF INDUSTRIAL ORGANIZATION, Volume 3 (Mark
Armstrong & Robert Porter, eds., 2007).
48
On this issue, David E. M. Sappington, Price Regulation, in 227 HANDBOOK OF
TELECOMMUNICATION ECONOMICS, Volume 1 (Martin E. Cave, Sumit K. Majumdar &
Ingo Vogelsang, eds., 2002), at 243, has remarked that: “If reviews of price cap plans are
scheduled infrequently, the costs of regulation can be reduced under PCR. Costs are reduced
further when the regulated firm is authorised to change prices within well-specified bounds. By
delegating pricing authority in this manner, regulators can avoid many costly and contentious
hearings to analyse proposed rate changes.”

18
 Incentive regulation was implemented because of several ROR drawbacks. 49 In a ‘cost

plus’ ROR framework, the cost figure was taken as a constant or upwardly-rising. Costs were

passed-on. This regulatory feature led to inflation of the capital base of firms and

inefficiencies. 50 Mechanism design principles were applied to derive new price regulation

approaches. 51 The PCR approach has been ‘price minus’ incentive regulation. In a ‘price minus’

approach, costs are not passed on. Firms’ incentives are clear. Profits arise from minimizing

costs. Productivity is a survival necessity.

4. Analysis Details

A. Antitrust Structural Remedy Variable Measurement

A market-related variable measures structural remedy outcomes as natural experiment 1.

The construct has measured market structure alteration consequent to entry barriers’ elimination

after TA 1996 structural change. This variable has been measured as the number of competitive

49
David Baron, Design of Regulatory Mechanisms and Institutions, in 1347 HANDBOOK OF
INDUSTRIAL ORGANIZATION, Volume II (Richard Schmalensee & Robert Willig, eds.,
1989).
50
Harvey Averch & Leland L. Johnson, Behaviour of the Firm under Regulatory Constraint, 52
Am. Econ. Rev. 1053 (1962); William J. Baumol & Alvin K. Klevorick, Input Choices and Rate
of Return Regulation: An Overview of the Discussion, 1 Bell J. Econ. & Man. Sc. 1, 169 (1970);
Timothy J. Brennan & Karen Palmer, Comparing the Costs and Benefits of Diversification by
Regulated Firms, 6 J. Reg. Econ. 6, 115 (1994); Paul Joskow, Inflation and Environmental
Concern: Structural Change in the Process of Public Utility Price Regulation, 17 J. L. & Econ.
291 (1974); Alfred Kahn, THE ECONOMICS OF REGULATION (1988).

51
Jan Paul Acton & Ingo Vogelsang, Introduction to the Symposium on Price Cap Regulation,
20 RAND J. Econ. 369 (1989); Gary Biglaiser & Michael Riordan, Dynamics of Price
Regulation, 31 RAND J. Econ. 744 (2001); Ronald R. Braeutigam & John C. Panzar, Effects of
the Change from Rate-of-return to Price-cap Regulation, 83 Am. Econ. Rev. 194 (1993); Ingo
Vogelsang & Jorge Finsinger, A Regulatory Adjustment Process for Optimal Pricing by
Multiproduct Monopoly Firms, 10 Bell J. Econ. 10, 157 (1979); Dennis L. Weisman, Superior
Regulatory Regimes in Theory and Practice, 5 J. Reg. Econ. 355 (1993).

19
entrants in a firm’s territory. 52 The rivalry variable, based on a count approach, 53 has been unique

for each ILEC in each time-period, as each ILEC experienced different entry circumstances from

competitive local exchange carriers (CLECs) at different times. There has been extensive inter-

ILEC variation in each period as well as intra-ILEC variation in rivalry over time.

B. Regulatory Behavioral Remedy Variable Measurement

The variable used to measure behavioral regulation has accounted for the transition from

ROR to PCR. It is used to assess behavioral remedy impact on performance. outcomes as natural

experiment 2. This ROR to PCR transition variable construction has been based on published

material, 54 with data also generously provided by Professors Sappington and Weisman, and on

data in National Regulatory Research Institute (NRRI) reports. The ROR to PCR transition

variable has been unique for each ILEC in each time-period. Each ILEC made a transition to

PCR at different points in time, since incentive scheme designs were specific to each ILEC.

There has been inter-ILEC variation in each period, as well as intra-ILEC variation over time. 55

C. Testing for Causal Effects on Outcomes of Treatments by Different Remedies

In statistical analyses, the entry event is an outcome of structural remedy methods. The

transition from ROR to PCR has been a behavioral remedy. Thus, structural antitrust and

52
Majumdar, supra note 19.
53
See Harry E. Frech, Corporate Demography and Empirical Industrial Organization: A
Critical Appraisal, 9 Int. J. Econ. Bus. 437 (2002).
54
Sappington, supra note 48.
55
Majumdar, supra note 20.

20
behavioral remedy variables, experienced by each firm in each time-period, are considered as

treatments, as described in the policy evaluation literature. 56

Formally, the causal effect of such regulatory treatments on efficiency outcomes are

evaluated for each observation by comparing outcomes for each treatment. The causal effects of

different treatments 57 on efficiency are evaluated by comparison to a control group of ILECs not

receiving the remedy treatment in each period.

With a binary treatment variable, taking the value of 1 as the regulatory treatment, and 0

as the non-regulatory control, potential outcomes for each observation may be defined as

outcomes to be observed under treatment (either structural or behavioral regulation) and control

(neither structural or behavioral regulation) conditions. The outcome for an observation

experiencing a treatment at one point in time, and the outcome for that very same observation not

experiencing the treatment at exactly the same point in time, can never be evaluated. Thus, a

direct causal effect can never be measured.

By using a 1 or 0 dummy regulatory treatment variable, the difference in outcomes for

each ILEC if it had experienced a regulatory treatment over the entire period, as well as relative

to other ILECs in its cross-section each year, may be evaluated. The regression adjustment

approach has been used in calculating the average treatment effects (ATE) between the

observations experiencing either treatment (coded as 1) and non-treatment experiencing

observations (coded as 0). ATEs are estimated from applying each treatment.

56
James J. Heckman & Edward Vytlacil, Structural Equations, Treatment Effects, and
Econometric Policy Evaluation, 73 Econometrica 669 (2005).
57
Stephen Morgan & Christopher Winship, COUNTERFACTUALS AND CAUSAL
INFERENCE: METHODS AND PRINCIPLES FOR SOCIAL RESEARCH (2007).

21
D. Evidence on Efficiency

Productive efficiency is a holistic idea; it encapsulates a richer dimension of economic

outcomes than the concept of static allocative efficiency often the focus of competition policy. 58

The data envelopment analysis (DEA) techniques enables computation of holistic productive

efficiency metrics. DEA is a non-parametric efficiency assessment method that permits

comparative assessment of abilities of firms, or organizational units, to be efficient.

The key efficiency driver is the ability to utilize resources optimally. Firms are complex

organizational constructs using multiple resources as inputs. They generate numerous outputs.

The DEA algorithms provide one efficiency score to assess how efficient a firm might have been

in translating its resource bundles into outputs. DEA scores permit normative analysis, based on

comparative assessment of the performance of each firm or unit relative to its peers.

Since the derivation of the original DEA models, 59 forty-plus years ago, the DEA

literature has expanded vastly; there are now, perhaps, tens of thousands of published items.

There are a few key works. 60 Using ratios as the variables in a DEA model strip out allocative

issues that potentially confound productivity calculations. 61

58
Eleanor M. Fox, Antitrust Welfare: The Brodley Synthesis, 90 Boston U. L. Rev. 1375 (2010).
59
Rajiv D. Banker, Abraham Charnes & William W. Cooper, Some Models for Estimating
Technical and Scale Inefficiencies in Data Envelopment Analysis, 30 Man. Sc. 30, 1078 (1984);
Abraham Charnes, William W. Cooper & Eduardo Rhodes, Measuring the Efficiency of Decision
Making Units, 2 Euro. J. Oper. Res. 429 (1978).

60
Banker, Charnes & Cooper, ibid.; Charnes, Cooper & Rhodes, ibid.; William W. Cooper,
Lawrence M. Seiford & Kaoru Tone, DATA ENVELOPMENT ANALYSIS: A
COMPREHENSIVE TEXT WITH MODELS, APPLICATIONS, REFERENCES AND DEA-
SOLVER SOFTWARE (2000); William W. Cooper, Lawrence M. Seiford & Kaoru Tone,
INTRODUCTION TO DATA ENVELOPMENT ANALYSIS AND ITS USES (2006); Arie Y.
Lewin & John Minton, Determining Organizational Effectiveness: Another Look, and an Agenda
22
 Based on data for the forty-one firms for the fourteen years of the study, I estimate DEA

efficiency models using one output: a measure of financial performance, calculated as the ratio

of total operating revenues to total assets, 62 and four cost ratios as inputs: the ratio of advertising

expenditures to sales; the ratio of customer operations expenses to sales; the ratio of corporate

operations expenses to sales; and the ratio of access charges borne to sales. The approach

controls for output and scale; it measures the impact of heterogeneous and unobservable firm-

specific effects in translating inputs into outputs.

These inputs would enable a firm to generate revenue outputs and maximize the

productivity of resources. The computations carried out gauge efficiency holistically, by

measuring the inputs of the key categories of activities necessary for operations, such as the

relative use of advertising, the relative conduct of customer related activities, the relative conduct

of administration related activities, and the relative use of others’ networks to place calls, by

measuring these in comparison with sales. The use of the ratio of sales income relative to the

assets used in the business captures an element of firms’ abilities to be efficient. Subsequent

for Research, 32 Man. Sc. 514 (1986); Subhash C. Ray, DATA ENVELOPMENT ANALYSIS:
THEORY AND ECHNIQUES FOR ECONOMICS AND OPERATIONAL RESEARCH
(2004).
61
The advantages of DEA are that no functional form assumptions are made, multiple outputs
and multiple inputs can be handled, ratios or indices can be used as inputs and outputs variables,
categorical variables can be used as inputs and outputs, and the technique allows an extremely
high level of flexibility in understanding how firms really perform and why. The ‘why firms
have performed the way they do’ issue can be assessed by using DEA scores as dependent
variables in subsequent regression models.

62
Marcia M. Cornett & Hassan Tehranian, Changes in Corporate Performance Associated with
Bank Acquisitions, 31 J. Fin. Econ. 211 (1992); H. Kurt Christensen & Cynthia A. Montgomery,
Corporate Economic Performance: Diversification Strategy versus Market Structure, 2 Strat.
Man. J. 327 (1981).

23
evaluation of firms’ abilities to translate the inputs in generating this output focuses inference on

intrinsic managerial abilities for resource utilization in firms.

Based on inputs and output described, one key measure of efficiency is generated by a

DEA program. This variable is used to assess remedy impact. The measure is as follows:

Productive Efficiency has been calculated as a ratio of output to inputs to assess technical or

productive efficiency in resource use. 63 The technical or productive efficiency score indicates an

entity’s ability in resource utilization, given the mix of resources and capabilities used over time

to produce its range of outputs. See the appendix for a description of DEA.

Table 3 records results for the structural remedy treatment impact on efficiency and table

4 results for the behavioral remedy treatment impact on efficiency. Results for other performance

variables are available on request. Results assessing technology investments are also available.

*************** Insert Table 3 Here ***************

The average values for the Productive Efficiency score is 0.763, as shown in columns (A)

of tables 3 and 4. The average treatment effects (ATEs) estimated from the treatment effects

analyses for the structural remedy variable is 0.017. These values are given in column (B) of

table 3. Table 3 shows the relative impacts of the ATEs on average values of the performance

metrics. Results for antitrust related outcomes are discussed. Column (C) numbers for the

Productive Efficiency variable indicate that the structural remedy treatment outcome has resulted

in a 2.23 percent enhancement of performance. Column (D) indicates this to be statistically

significant, but only at a 10 percent level.

The results obtained for the behavioral remedy treatment variable are given in table 4.

The average treatment effects (ATEs), estimated from the treatment effects analyses for the

63
Cooper, Seiford & Tone, supra note 60.
24
behavioral remedy variable, has been 0.033 for the Productive Efficiency score. These values are

given in column (B) of table 4. Column (C) numbers for the Productive Efficiency variable

indicate the behavioral regulation treatment to result in 4.33 percent better performance in

resource utilization. Column (D) details indicate that this has been a statistically significant

result, at a 5 percent level.

*************** Insert Table 4 Here ***************

5. Comparative Evaluation

A. Evaluation of Structural versus Behavioral Remedy Outcomes

The issue is which method works better, the antitrust (structural) or the regulatory

(behavioral)? Using a standard statistical test of differences in magnitude between two variables,

I evaluate, as natural experiment 3, if the antitrust (structural) approach or the regulatory

(behavioral) remedy has had a greater impact in enhancing efficiency. Results are in table 5.

*************** Insert Table 5 Here ***************

Table 3 and 4 reported results on how the structural versus behavioral remedies impacted

DEA-derived efficiency scores. For the Productive Efficiency score, the regulatory (behavioral)

remedy has statistically had a greater impact than the antitrust (structural) method in enhancing

efficiency. The impacts were 2.23 percent for the structural remedy (column [A] in panel [B] of

table 3) and 4.33 percent (column [A] in panel [B] of table 4) for the behavioral remedy.

B. Robustness Check

An evaluation of why price caps, as endogenous phenomena, 64 were implemented would

depend on firm-level factors, such as past performance; these would have influenced the

64
Armstrong & Sappington, supra note 47; Sappington, supra note 48.

25
implementation of price cap regulatory schemes for specific firms. As a robustness check,

controlling for inclusion of endogenous factors, past performance variables have been included

as price caps determinants for each observation, in a selection equation with the price cap

variable then determining performance in an outcome equation. The results shows the price cap

estimates to be of relatively the same magnitude, (in fact, they are larger), sign and significance

as the estimate values reported in tables 2 and 4. 65

C. Summary

Overall, significantly larger positive outcomes to have emerged from sector-specific

regulatory (behavioral) remedy applications vis-à-vis the concurrent antitrust (structural) remedy

application. The use of further performance variables to comparatively test the ideas has yielded

very similar results. Such additional results are available on request.

6. Interpreting the Evidence

A. Explaining the Entry and Efficiency Outcome

The structural (antitrust) remedy resulted in entry in incumbents’ territories. A material

outcome of such entry on firms has been positive efficiency enhancement, albeit at a mildly

significant level. I restate thoughts on outcome occurrence. Competitive rivalry means attracting

customers through lower prices. Without low costs, this is unlikely. Competition pressures firms

to increase efficiencies by eliminating waste, through x-inefficiency reduction, 66 placing

65
Estimation details may be requested.
66
Harvey Leibenstein, INSIDE THE FIRM: THE INEFFICIENCIES OF HIERARCHY (1987).

26
downward cost pressure, forcing firms to meet customer needs via lower prices, and promoting

efficient resource use. 67

Given volition, firms respond to change. 68 New firm entry impacts industry-wide

outcomes. 69 New businesses introduce economic dynamism, inviting responses from incumbent

firms. 70 By enhancing pressures on incumbents to reduce margins, 71 new entry forces

incumbents to cut costs. 72 Concomitantly, competition-shaping occurs by incumbents’ capability

augmentation. These enhance firms’ abilities to reconfigure competences and address changes. 73

In environments with mandated entry, incumbents would need to reconfigure their pool of skills

to protect advantages, and resources to do so would be generated by emergent efficiencies.

Entry also enhances competition via mimetic effects, affecting incumbents and entrants,

such that performance comparison is easier, reducing information asymmetries, agency

problems 74 and providing incentives to invest in reputations. 75 With new firm entry, higher

67
Harvey Leibenstein, BEYOND ECONOMIC MAN: A NEW FOUNDATION FOR
MICROECONOMICS (1976).
68
Brian Loasby, Capabilities and Strategy: Problems and Prospects, 19 Ind. & Corp. Ch. 1301
(2010).
69
Michael Fritsch, (2008): How Does New Business Formation Affect Regional Development?
Introduction to the Special Issue, 30 Small Bus. Econ. 1 (2008).

70
James A. Clifton, Competition and the Evolution of the Capitalist Mode of Production, 1
Cambridge J. Econ. 137 (1977).
71
Michelle M. Katics & Bruce C. Petersen, The Effect of Rising Import Competition on Market
Power: A Panel Data Study of US Manufacturing, 52 J. Ind. Econ. 277 (1994).
72
Fritsch, supra note 69; Leibenstein, supra note 66.
73
David J. Teece, Gary Pisano & Amy Shuen, Dynamic Capabilities and Strategic Management,
18 Strat. Man. J. 509 (1997).

27
demand elasticity results, as supplier switching increases. Efficient firms can capture larger

markets through price declines. High costs are dysfunctional. 76 Inefficiencies lead to lower

profits, increasing bankruptcy risk, and risk presence induces better performance. 77

B. Explaining the Price Cap and Efficiency Outcome 78

The remedial transition from ROR to PCR regimes has been positively and significantly

associated with higher efficiencies. I restate ideas on outcome occurrence. The ROR negative

efficiency effects arise due to encouraging firms’ navel-gazing, motivating firms to develop an

internal and self-absorbed focus. Assured upward price revisions provide promise of profit

outcomes, even if firms’ costs are not covered through revenues, as excess costs are likely to be

recoverable, as revenues, through later regulatory proceedings. In this milieu, a firm depends on

relationships with its regulator, with its incentives oriented to obtain favorable regulatory

decisions. This process can engender regulatory capture. 79

Information asymmetries between firms and regulators matters. A problem with ROR has

been incentive incompatibility. Because of information asymmetries, regulators are not certain or

74
Oliver D. Hart, The Market Mechanism as an Incentive Scheme, 74 Bell J. Econ. 74, 366
(1983); Leibenstein, supra note 67.

75
Barry Nalebuff & Joseph Stiglitz, (1983): Information, Competition and Markets, 73 Am.
Econ. Rev. 278 (1983); John Vickers, Concepts of Competition, 47 Oxford Econ. Pap. 1 (1995).
76
David Scharfstein, Product-market Competition and Managerial Slack. 19 RAND J. Econ.
147 (1988).
77
Klaus M. Schmidt, Managerial Incentives and Product Market Competition, 64 Rev. Econ.
Stud. 191 (1997).
78
See Majumdar, supra note 20, for further details on these ideas.
79
Stigler, supra note 27.

28
aware of firms’ true costs. Adverse selection arises because firms have better information about

key elements of the regulatory environment. 80 They will not disclose to regulators their actual

costs. Thus, inappropriate remedy, by regulatory agencies, design is a risk. 81 Direct revelation

mechanisms explain how these occur. These revelation mechanisms are rules specifying how

regulators’ mandates are determined based on reports received. These revelation mechanisms can

be in disequilibrium. Firms, therefore, command rent from possessing privileged information.

Ex-ante, firms may not voluntarily disclose costs on which regulators can base allowable rates of

return. Thus, there is incentive incompatibility between firms and regulators.

There is moral hazard, as firms can alter actuals in cost statements to provide misleading

estimates. Thus, prices can be set to cover stated, but inaccurate, cost levels; firms’ managers

have no incentives to lower costs; and regulators cannot monitor managers to verify costs. Thus,

moral hazard issues relate to managerial effort variations in response to regulatory incentives. 82

80
David Baron & Roger Myerson, Regulating a Monopolist with Unknown Costs, 50
Econometrica 911 (1982); Tracy Lewis & David E. M. Sappington, Regulating a Monopolist
with Unknown Demand and Cost Functions, 18 RAND J. Econ. 438 (1988).

81
The principle was highlighted by Allan Gibbard, Manipulation of Voting Schemes: A General
Result, 41 Econometrica 587 (1973). For the revelation principle see Partha Dasgupta, Peter
Hammond & Eric Maskin, The Implementation of Social Choice Rules: Some General Results on
Incentive Compatibility, 46 Rev. Econ. Stud. 185 (1979) and Milton Harris & Robert M.
Townsend, Resource Allocation under Asymmetric Information, 49 Econometrica 33 (1981). A
synthesis is in Roger B. Myerson, Incentive Compatibility and the Bargaining Problem, 47
Econometrica 61 (1979).

82
Jean-Jacques Laffont and Jean Tirole, Using Cost Observations to Regulate Firms, 94 J. Pol.
Econ. 614 (1986); David Baron & David Besanko, Monitoring, Moral Hazard, Asymmetric
Information and Risk Sharing in Procurement Contracting, 18 RAND J. Econ. 509 (1987).

29
 The PCR approach is light-touch regulation (Littlechild, 2018) versus ROR intervention.

A ‘fixed’ price and ‘variable’ cost PCR framework mimics the market. 83 With a ‘price minus’

approach, firms focus externally to establish a market for a fixed-price service. Given a price

cap, the service has to possess attributes associated with that price point. Interdependencies

between market conditions and firms’ activities, such as product development, are fostered. With

a price ceiling, lowered costs generate profits. This leads to horizon broadening, to obtain

savings from all sources.

PCR schemes are incentive compatible. They de-link firms’ costs details from the

attention of regulators. Issues arising from non- or wrong-disclosure are obviated. Thus, firm and

regulator adverse selection, moral hazard and regulatory capture problems are avoided. Cost

details are not required as, given set prices, it is for firms to perform better using its resources

effectively. Performance outcomes are based on capabilities’ use. The freedom promotes

internally-focused intrapreneurship to execute efficiency-engendering strategies. The PCR

scheme motivates firms to develop outcome-enhancing skills and meet accountability standards.

7. Discussion on the Impact of Different Remedies

Both methods have had positive efficiency consequences, but the carrot has been better

than the stick. Price cap mechanisms (behavioral regulation) have out-performed entry (structural

antitrust) mechanisms. Based on a summary of the distinction between the two methods (as laid

out in Table 1), a structural antitrust approach is an ex-post destructive attack on firms’

entrepreneurship, that negates firms’ prior strategic investments, by placing constraints or

rendering apart an organically created entity. A behavioral regulation approach provides ex-ante

83
David E. M. Sappington & Dennis L. Weisman, DESIGNING INCENTIVE REGULATION
FOR THE TELECOMMUNICATIONS INDUSTRY (1996). See Majumdar, supra note 20.
30
constructive support of firms’ future entrepreneurship, and intrapreneurship as well, by the

provision of growth incentives based on the way that explicit mechanisms are designed.

Recent suggestions for enhancing the role of structural approaches in dealing with

antitrust contingencies, and using structural separations as the preferred remedy, are commented

on. Subsequently, the article makes a case for using behavioral remedies in institutional design.

A. Human Nature Assumptions Underlying Behavioral Remedy Results

Taking an Austrian 84 perspective, behavioral remedies can be considered as examples of

managed regulation. The behavioral remedy approach evaluated has been based on mechanism

design principles incorporating realistic behavior assumptions and the application of incentives.

The approach has recognized information asymmetry as ubiquitous, 85 and incorporated ideas to

counter these in framing institutional rules. 86

Human beings are imperfect. Incompetence is generic and widespread. Departures from

efficiency is frequent, and such departures are explainable by organizational and psychological

factors. 87 Organizational failure is common, because of irrational behavior. 88 The key

assumption of rationality, that firms would never behave sub-optimally to obtain benefits by

84
Israel M. Kirzner, Entrepreneurial Discovery and the Competitive Market Process: An
Austrian Approach, 35 J. Econ. Lit. 60 (1997).
85
Eric S. Maskin, Mechanism Design: How to Implement Social Goals, 98 Am. Econ. Rev. 567
(2008).
86
Steven C. Salop & Carl Shapiro, Jean Tirole’s Nobel Prize in Economics: The Rigorous
Foundations of Post-Chicago Antitrust Economics, 29 Antitrust 76 (2015), at 81, state that:
“Mechanism design theory concerns the optimal design of incentive systems under
circumstances of imperfect information.”
87
Leibenstein, supra note 66.
88
Leibenstein, supra note 67; James G. March & Herbert A. Simon, ORGANIZATIONS (1958).

31
unilateral anti-competitive actions unless they were willing to take profit hits, 89 which is an

article of faith among many antitrust scholars, is never observed in reality. 90

Rather, people behave irrationally. 91 Based on mechanism design ideas, incorporating

asymmetric information concerns in regulatory design schemes mitigate against adverse

selection and moral hazard concerns. Hence, the optimal regulation approach 92 suggests ideas for

remedy design accounting for foible-based, non-maximizing and sub-optimizing behavioral.

Behavioral remedies, based on mechanism design principles incorporating realistic

assumptions about human nature, may relegate competitive forces to a secondary role. This

could occur through impacting firms’ decisions, and negate incentives generated by the market

mechanism, 93 by forcing firms to focus on efficiency and delivery considerations. How this can

happen is discussed next.

B. Key Elements of Contemporary Behavioral Remedies

This section discusses principles underlying effective behavioral remedies. Elements of

performance-promoting regulatory models are: [I] goal-setting; [II] autonomy; [III] motivation;

[IV] discovery; and [V] accountability. A characteristic of behavioral approaches is that a

89
Richard A. Posner, The Chicago School of Antitrust Analysis, 127 U Pa. L. Rev. 925 (1979).
90
Dan Ariely, The End of Rational Economics, July Harvard Bus. Rev. 78 (2009). Jolls, Sunstein
& Thaler, supra note 22. A need for incorporating dynamic strategic thinking into design of
institutional remedies is recognized; see Fox, supra note 58.
91
Korobkin & Ulen, supra note 22; Williamson, supra note 16. Irrationality and failures to
optimize are ubiquitous conditions; see March & Simon, supra note 88; Herbert A. Simon,
ADMINISTRATIVE BEHAVIOR (1947).
92
Laffont & Tirole, supra note 82.
93
Salop & Shapiro, supra note 86.

32
regulatory scheme assessed be anchored in attainable performance goals. A core focus is on

outcome delivery. 94 Such approaches, allowing for reasonable execution time and imposed

explicit delivery targets for these performance goals, provide autonomy incentives. 95 Goal-based

regulations need not specify how to achieve compliance. Instead, the goals set by authorities and

firms, jointly, ought to permit firms liberty to choose among the various ways to comply. This

dimension of behavioral regulation allows firms full freedom to be completely entrepreneurial.

Autonomy is important. 96 Engendering freedom of economic opportunity has been a

central theme of institutional legislation in the United States for over a century. 97 The design of

behavioral regulatory schemes, using mechanism design principles, shifts compliance audit onus

to the firms themselves. It removes a layer of suspicion that has overlaid regulators, that they

would be captured by regulated client firms, 98 a historically accurate view of reality holding

sway for decades. Delinking regulatory mechanism design and compliance audit, by substituting

well-defined goals that firms have the autonomy to achieve, has been a powerful motivational

idea leading to behavioral regulation success.

94
David A. Balto, Antitrust Enforcement in the Clinton Administration, 9 Cornell J. L. and Pub.
Pol. 62 (1999).
95
Michael E. Porter, M. & C. van der Linde (1995): Toward a New Conception of the
Environment-Competitiveness Relationship 9 J. Econ. Persp. 97 (1995)
96
Other behavioral approaches have been criticized. Points of contention are intrusiveness; the
fact that regulators would engage in extensive micro-processing of firms’ managements’ tasks,
before businesses could undertake any decision-making; the fact that regulators would be subject
to corrupt influences; and the fact that liberty would be compromised; Wright & Ginsburg, supra
note 22.
97
Eleanor M. Fox, The Modernization for Antitrust: A New Equilibrium, 66 Cornell L. Rev. 66,
1140 (1981).
98
Stigler, supra note 27.

33
 Autonomy allows alternatives to be assessed by firms. The regulatory approaches allow

firms independence in exercising judgement to choose the best means to achieve regulatory

goals, objectives and targets. The approach is useful in the fast-moving digital technology sector,

where numerous means may be used to get to the same ends. Though goals can be defined at

varying degrees of specificity, they are expressed at a high level, encapsulating broad principles

and standards firms are challenged to meet. As granularity levels increase, goals can be

decomposed into operational objectives and tangible targets. Goal-based regulation removes the

mechanical application of rules, and permits firms discretion. Conversely, prescriptive

regulations define compliance achievement via the means of explicit rules and mandates.

Autonomy enhances performance via motivating discovery processes. 99 The discovery

notion 100 is old. The discovery procedure is a process of generating key information and

knowledge which would engender a firm’s efficiency. 101 The procedure would not be known, or

knowable, to others since the process would be idiosyncratic to firms and based on possessing

unique traits. Discovery-driven outcome delivery defines the notion of an outcome midway

between those resulting from deterministically-generated information, as assumed in neo-

classical models, and outcomes generated randomly. 102

99
Janice M. Beyer & Harrison M. Trice, IMPLEMENTING CHANGE: ALCOHOLISM
POLICIES IN WORK ORGANIZATIONS (1978).
100
Kirzner, supra note 84.
101
Friedrich A. Hayek, The Use of Knowledge in Society, 35 Am. Econ. Rev. 519 (1945).
102
Michael E. Beesley & Stephen C. Littlechild, The Regulation of Privatized Monopolies in the
United Kingdom, 20 RAND J. Econ. 454 (1989).

34
 In a dynamic framework, based on the idea that today’s activities would affect

tomorrow’s outcomes, 103 time adequacy is important for discovery and to implement new

processes. Without time-bound deliverable goals, competitive efficiency benchmarks become

theoretical; and the greater the freedom for firms to exercise choice to meet goals the better will

be the results. 104 Flexible approaches stimulate firms to move from compliance to phenomenon

identification and internalization. 105 If firms have flexibility to customize discovered

functionalities to external demands, implementation of regulations will be in the spirit of the law.

C. Incorporation of Market Elements Promoting Strategic Drive in Behavioral Remedies

This section discusses the principles underlying the PCR behavioral remedy model. The

PCR scheme has been grounded in an ex-ante autonomy-oriented market-based world-view,

whereby PCR, by putting a price ceiling, would motivate firms’ dynamic entrepreneurial cost

reductions to obtain higher profits. The PCR approach has been a method of regulation based on

the idea that firms’ private information and actions are difficult to monitor. Thus, there has been

a need to provide firms goal-based incentives for them to share information, with others, and to

make exertions. 106 As a result, firms would be motivated to search for options and choices in

designing strategies to meet efficiency goals.

103
Douglas H. Ginsburg & Joshua D. Wright, Dynamic Analysis and the Limits of Antitrust
Institutions, 78 Antitrust L. J. 1 (2012).
104
Sumit K. Majumdar & Alfred A. Marcus, Rules versus Discretion: The Productivity
Consequences of Flexible Regulation, 44 Acad. Man. J. 170 (2001); Alfred A. Marcus,
Implementing Externally Induced Innovations: A Comparison of Rule-bound and Autonomous
Approaches, 31 Acad. Man. J. 235 (1988).
105
Herbert C. Kelman, Processes of Opinion Change, 25 Public Opinion Q. 608 (1961).
106
Dennis L. Weisman & Johannes P. Pfeifenberger, Efficiency as a Discovery Process: Why
Enhanced Incentives Outperform Regulatory Mandates, 16 Electricity J. 52 (2003).
35
 Firms would search for information to discover opportunities for gain. These gains could

be via market exploitation or by finding new cost-minimization possibilities. The discovery

process, for new market exploitation and cost-reduction opportunities, would involve searching

for the correct asset combinations, relevant operating procedures and business plans yielding best

efficiency outcomes. 107 Indeed, Ludvig von Mises 108 had stated that: “Profit-seeking speculation

is the driving force of the market as it is the driving force of production.”

Thus, strategic drives within firms can be energized through goal-based autonomy-

enhancing regulations, of which the PCR model enhances flexibility. De-linking of operational

interactions between firm and regulator sets firms free to undertake requisite tasks to achieve

performance outcomes, given set price goals. There is no cost negotiations, with associated

adverse selection arising. If a firm agrees to a non-varying price schedule, it commits to pro-

actively taking risks to discover strategic possibilities. The firm is accountable for resulting

efficiency outcomes. It is a firm that continuously engages in strategic adaptation, since making

changes in real-time is essential, as the doctrinal approach that everything must go as per the

book is unworkable. Its behaviour is that of firms conforming to the stylized, but pragmatic,

models discussed in the Austrian entrepreneurship school scholarship. 109

107
Stephen C. Littlechild, Regulation and the Nature of Competition, 67 J. Air Transport Man.
67, 211 (2018).
108
Ludvig von Mises, HUMAN ACTION (1949), at 325.
109
Kirzner, supra note 84.

36
 Therefore, central agency presumptuousness, in behaving like a choice architect, 110 in

orchestrating arrangements in a libertarian paternal social order framework, 111 is replaced by a

decentralized common-good discovery vision. This visioning process can bring out best qualities

in humans. 112 Centralized planning, undertaken by a regulator in a micro-management oriented

command-and-control regime, has been substituted with decentralized planning, continuously

carried out by firms themselves to meet regulators’ targets. Any flawed plans could be altered,

with needed adjustments, in light of experience. Firms’ behavior traits would drive discovery

processes to gain higher efficiencies via intra-firm planning and coordination processes. 113

D. Fiscal Consequences of Behavioral versus Structural Alternatives

A financial dimension can be imparted to the discourse by evaluating fiscal consequences

of antitrust (structural) policies use versus regulatory (behavioral) policies. From tables 2 and 3,

the relative enhanced efficiency gains from using antitrust (structural) policies have been 2.23

percent versus those from regulatory (behavioral) policies of 4.33 percent, and the net gain from

behavioral policies has been incremental efficiency gains of 2.1 percent. The sector, as a whole,

has enjoyed average revenues of $100 billion over each of the fourteen years. 114 Hence,

110
Kovacic & Cooper, supra note 22.
111
See Richard H. Thaler & Cass R. Sunstein, Libertarian Paternalism, 93 Am. Econ. Rev. 175
(2003).

112
Elinor Ostrom, Beyond Markets and States: Polycentric Governance of Complex Economic
Systems, 100 Am. Econ. Rev. 641 (2010).
113
On centralized versus decentralized planning, Hayek, supra note 101, at 520-521, as the
foremost proponent of human autonomy, had written that: “This is not a dispute about whether
planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one
authority for the whole economic system, or is to be divided among many individuals.”
114
Majumdar, supra note 19.
37
additional efficiency gains of the regulatory (behavioral) approach over that of the antitrust

(structural) approach has approximated over $2 billion annually. Fiscally, calculations of

increment show that a regulatory (behavioral) alternative markedly out-performs an antitrust

(structural) policy alternative.

E. Structural Alternatives and their Consequences

This section discusses the current clamor for the structural remedies stick, such as

separations use. While need for institutional enforcement is high, given dysfunctional

consequences of modern monopolization, antagonism to letting institutional involvements be

interventionist is very high. Thus, suggestions have involved some form or another of a one-off

structural approach. 115 There is clamor for structural actions against technology companies,

including separations and break-ups. 116 The accusations against the technology companies

revolve around abusive marketplace behavior. Egregious firms’ activities are considered to occur

in search, smartphones, e-commerce and social networking areas. 117 Proscriptions placed to

115
The literatures contains thoughts along both dimensions; on the issue of it is only competition
that matters, see Gregory J. Werden, Antitrust’s Rule of Reason: Only Competition Matters, 71
Antitrust L. J. 713 (2014), and the issue that competition is completely over-rated, see Stucke &
Ezrachi, supra note 6.
116
See Chris Hughes, It’s Time to Break Up Facebook, N. Y. Times, May 14th (2019)
(https://www.nytimes.com/2019/05/09/opinion/sunday/chris-hughes-facebook-zuckerberg.html);
Elizabeth Warren, Here’s How We Can Break Up Big Tech, Medium, March 8, (2019)
(https://medium.com/@teamwarren/heres-how-we-can-break-up-big- tech-9ad9e0da324c);
Timothy Wu, The Case for Breaking Up Facebook and Instagram, The Washington Post,
September 28th, (2018) (https://www.washingtonpost.com/outlook/2018/09/28/case-breaking-up-
facebook- instagram/). The longest statement yet, for structural separation, has been made by
Khan, supra note 3, who has stated that the hazards of many integrated technology platform
structures dominating modern commerce call for implementing proscriptions, or limits, on these
companies’ operations.
117
Competition Policy International, supra note 3.
38
constrain anti-competitive behavior would necessitate placing limits on market entry, or

requiring that distinct businesses be carried out in separate and distinctly-different organizational

entities, to enhance customer welfare. A view posits that neglect of structural remedies might

mean significant harm. 118 A school of thought, 119 however, opines against such institutional

actions, but without stating the assumptions and reasoning for their opinions.

Structural remedies, involving separations, have actually been very few in practice. The

notable ones to occur have been universally evocative in representing how business may have

earlier behaved badly. The most notable structural separations remedies in history have been the

118
Kwoka & Moss, supra note 28, have come down on the side of structural remedies, such as
divestitures of subsidiaries or stand-alone businesses. Such remedies are feasible, since such
businesses would be a-priori separate. Hence, disposal would simply involve corporate law and
finance transactions, rather than dismantling organic entities. Moss, supra note 18, has endorsed
enforcement of remedies in antirust cases, however, also recognizing that problems in applying
institutional conduct remedies, thought through with respect to mergers, will have arisen because
of a focus on compliance by concerned firms. Hence, the institutional activity would involve
policing and be process-oriented in nature. Such problems or issues could be vitiated were there
to be a focus on outcome-oriented performance remedies. Most recently, Moss, supra note 1,
takes a more nuanced view, given the public controversy surrounding the imputed behavior of
the large technology companies, and suggests that numerous critical questions, on which as yet
no answers exist, as to the nature of monopoly durability, interoperability and network effects,
have to be addressed before direct plunges into structural break-up schemes are made. The costs
of remedial outcomes, unforeseeable in the absence of counter-factual evidence, could be worse
than costs of presumed maladies.
119
Tyler Cowen, Breaking Up Facebook Would Be a Big Mistake, Slate, June 13th (2019)
(https://slate.com/technology/2019/06/facebook-big-tech- antitrust-breakup-mistake.html);
Nicholas Economides, Antitrust Issues in Network Industries, in 343 THE REFORM OF EC
COMPETITION LAW: NEW CHALLENGES (Ioannis Lianos & Ioannis Kokkoris, eds., 2009);
Aaron Edlin & Carl Shapiro Why Breaking Up Facebook Would Likely Backfire, San Jose
Mercury News, September, 23rd (2019) (https://www.mercurynews.com/2019/09/19/opinion-
why-breaking-up-facebook-would- likely-backfire/); Dipayan Ghosh, Don’t Break Up Facebook
- Treat it Like a Utility, Harvard Bus. Rev. (2019) (https://hbr.org/2019/05/dont-break-up-
facebook-treat-it-like-a-utility); Fiona M. Scott Morton, Why ‘Breaking Up’ Big Tech Probably
Won’t Work, Yale Insights, July 18th (2019) (https://insights.som.yale.edu/insights/why-breaking-
up-big-tech-probably-wont-work).

39
Standard Oil and the AT&T divestiture cases. 120 In the AT&T case, the performance of many

‘Baby Bells,’ separated to form the RHCs, subsequently improved in performance, as evidence

shows, but the then-parent monopoly company AT&T itself died, 121 by the early 2000s. 122

On the AT&T divestiture, which was the largest structural break-up, Robert W.

Crandall 123 had said that same outcomes might have been achieved without resorting to

structural separation. Thus, other proposed communications sector structural separation schemes

were thought likely to be ineffective, were they to be put through. 124 The punishment might not

have fitted the crime. Indeed, Robert Crandall has stated that: “A careful review of the history of

major Section 2 Sherman Act monopolization cases in which the government succeeded in

120
Standard Oil Co. v. United States, 22 U. S. 1 (1911); United States v. AT&T, 552 F, Supp.
131 (D. D. C. 1982) aff’d mem. sub nom. Maryland v. United States, 460 U. S. 1001 (1983).
121
The current AT&T itself actually used to be a ‘Baby Bell’ named Southwestern Bell
Telephone, which later became SBC and then having bought Pacific Telesis, Ameritech, the old
AT&T which was by then a long-distance company, and Bell South, became the largest
telecommunications company in the United States. Then, SBC re-named itself AT&T. Thus, the
sector was fully re-monopolized within the space of two decades; see Majumdar, supra note 2;
Majumdar, Moussawi & Yaylacicegi, supra note 39.
122
Shelanski & Sidak, supra note 8, argued against the then-likely structural separations
proposal for resolving the Microsoft antitrust case, and Bronwyn Howell, Richard Meade &
Seini O'Connor (2010): Structural Separation versus Vertical Integration: Lessons for
Telecommunications from Electricity Reforms, 34 Telecom. Pol. 392 (2010) stated that the risks
and complications arising from structural separations, as evidenced in the electricity sector,
would more than outweigh any putative benefits and render these exercises infructuous.
123
Robert W. Crandall, The Failure of Structural Remedies in Sherman Act Monopolization
Cases, 80 Oregon L. Rev. 109 (2001).
124
R. W. Crandall & J. Gregory Sidak (2002): Is Structural Separation of Incumbent Local
Exchange Carriers Necessary for Competition? 19 Yale J. Reg. 335 (2002).

40
gaining significant structural relief does not suggest that this form of antitrust is an effective

instrument to restore or establish competition in a marketplace.” 125

Extrapolating to modern technology conundrums, separation, as a standard structural

remedy, will not be the remedy of choice to deal with emergent anti-competitive behavior

contingencies. 126 Further on the AT&T divestiture, Crandall states that: “The landmark “low-

tech” cases—such as Standard Oil, and American Tobacco—did not improve competition in the

petroleum or tobacco industry. “High-tech” cases against Microsoft and AT&T had different, but

not altogether favorable results……….The AT&T case, which did succeed in opening long-

distance calling markets initially, evolved into a 20-year regulatory quagmire, largely caused by

the 1982 court decree. Competition in telecommunications eventually emerged in local services,

not because of the decree, but because of technological change. The development of the Internet

in 1990s, the emergence of smartphones, and the conversion of cable television networks to offer

two-way “broadband” connections created vigorous competition among traditional wire-based

telecom carriers, wireless carriers, and cable TV companies.”

125
Robert W. Crandall, The Dubious Antitrust Argument for Breaking Up the Internet Giants,
54, Rev. Ind. Org. 627 (2019), at 647-648.
126
Crandall, ibid. at 648, states that: “The landmark “low-tech” cases—such as Standard Oil, and
American Tobacco—did not improve competition in the petroleum or tobacco industry. “High-
tech” cases against Microsoft and AT&T had different, but not altogether favorable
results……….……….The AT&T case, which did succeed in opening long-distance calling
markets initially, evolved into a 20-year regulatory quagmire, largely caused by the 1982 court
decree. Competition in telecommunications eventually emerged in local services, not because of
the decree, but because of technological change. The development of the Internet in 1990s, the
emergence of smartphones, and the conversion of cable television networks to offer two-way
“broadband” connections created vigorous competition among traditional wire-based telecom
carriers, wireless carriers, and cable TV companies.”
41
 Instead, a non-interventionist managed regulation model will be a better institutional

alternative to control the behavior of contemporary technology firms, as exogenous technical

changes will induce productivity-enhancing endogenous innovative activities on their part.

F. An Alternative Managed Regulation Model

The results of the current study show that behavioral regulatory remedies out-perform

structural antitrust remedies. So far, in enforcement applications, the structural approach is

preferred over the behavioral approach. The view that behavioral remedies apply centralized and

hands-on interventionist institutional decisions, instead of letting market processes work out

fully, is widespread. 127 Yet, such a view is wholly inaccurate and there is a need for alternatives.

Recognition of the complex strategic patterns of firms’ behavioral predilections can be a

first step in designing proper policy and enforcement mechanisms. Assumptions as to firms’

predilections can be utilized to design institutional remedies. Innovative efficiency-based ideas

can be applied to design high-performance regulatory remedies. Thereby, a framework for

managed regulation can be evolved.

To attain optimal results in designing managed regulation arrangements, principles of

mechanism design can be supplemented with a theory of firm efficiency that incorporates

components of [I] goals, [II] autonomy, [III] motivation, [IV] discovery, and [V] accountability.

These components meld together in forming the contents of a managed regulation framework.

The setting of goals and associated award of autonomy generates motivational forces, which then

promote discovery of new means of doing business; thereafter, enforcing accountability of firms

for the outcomes, to be generated in respect of the goals agreed on, completes the circle.

127
Relevant contemporary institutional enforcement thought is vapid, and present arrangements
are thought to be unworkable. See Moss, supra note 18 and Shapiro, supra note 5,
42
 Applying such an approach can provide for effective behavioral remedy design to

engender efficiencies. Efficiencies are important 128 in an evolutionary perspective. 129 Dynamic

efficiency outcomes result from temporal processes, which encapsulate evolutionary forces

influencing firms to change their ways of doing business. These changes can be used to modify

business models and generate efficiencies. 130

Strategic behavior outcomes, then, is not considered a function of exogenous industry

characteristics, a view that the intellectual logic of the structural antitrust school is based on, or a

result of rational actions to maximize profits. Strategic behavior, instead, is an outcome of

endogenous coordination of firms’ attributes such as routines, standard operating procedures and

unique operations and investment capabilities, based on human motivations. 131 This approach

stresses dynamics, 132 and unites human factor dimensions into regulatory mechanism design.

Given concerns requiring amelioration, intricate digital economy remedies could drive a

need for oversight skills that would overwhelm antitrust and regulatory authorities’

128
Joseph F. Brodley, The Economic Goals of Antitrust: Efficiency, Consumer Welfare, and
Technological Progress, 62 NYU L. Rev. 1020 (1987).
129
William J. Kolasky & Andrew R. Dick, The Merger Guidelines and the Integration of
Efficiencies into Antitrust Review of Horizontal Mergers, 71 Antitrust L. J. 207 (2003).

130
Ilene Gotts & Richard Rapp, Antitrust Treatment of Mergers Involving Future Goods, Fall
Antitrust 100 (2004).

131
David J. Teece, Explicating Dynamic Capabilities: The Nature and Microfoundations of
(Sustainable) Enterprise Performance, 28 Strat. Man. J. 1319 (2007).
132
J. Gregory Sidak & David J. Teece, Dynamic Competition in Antitrust Law, 5 J. Comp. L. &
Econ. 581 (2009).

43
capabilities. 133 A managed regulation framework would work better. Granting firms autonomy,

and then delegating to these firms the power of agenda design, to permit them to do what they

want, relieves regulators of the need to be micro-processors, of firms’ activities, so long as set

goals are achieved. But, as a first step, goals, and the package of associated operational

objectives and tangible targets, have to be well thought out. Regulators, firms and consumers

need to have a hand in such goal design, so that stakeholders’ welfare is not compromised.

8. Conclusion

There is continuing debate on whether structural (stick) or behavioral (carrot) remedies

are preferred in implementing institutional mandates. Antitrust and regulatory authorities’ goals

are to balance anti-competitive and efficiency considerations. A distinctive context has provided

historical data, for an entire population of firms for a fourteen-year period, to evaluate structural

and behavioral regulations’ impacts on performance, for same firms at the same time.

The 1984 break-up of AT&T was followed by structural changes accompanying the

Telecommunications Act 1996 implementation to permit competitor entry into ILECs’

territories. Simultaneously, the ILECs had been subject to price regulation, a behavioral remedy

to ameliorate local monopolists’ pricing behavior. The two parallel remedies are compared, in

like-for-like analyses, to assess outcome variations. Well-designed behavioral regulations (the

carrot), grounded in realistic views about firms, representing how market processes work in an

ex-ante manner, have had a larger positive impact relative to structural remedies (the stick). The

incremental benefit of the carrot vis-à-vis the stick has been $2 billion annually.

133
Spencer W. Waller, Access and Information Remedies in High-Tech Antitrust, 8 J. Comp.
L. & Econ. 575 (2012).

44
 There is demand for actions against technology companies involving separations. Such

actions may not be able to hold technology firms accountable. Ameliorative structural remedies,

based on an ex-post destructive attack on firms’ prior entrepreneurship conduct would yield one-

shot outcomes. After a period of adjustment to the institutionally-altered scenario, there is ever-

present clear and significant danger of firm attitudes displaying retrograde patterns and the

spectacle of recidivist behavior. 134

Behavioral regulation approaches, rather than a structural remedy, may be relevant in

ameliorating harmful behavior. Such behavioral approaches are based on an ex-ante constructive

support of firms’ future conduct. These behavioral designs permit firms strategic autonomy and

operational flexibility, eliminate adverse selection and moral hazard concerns and make firm and

institutional incentives compatible. These conditions permit firms to display traits consistent with

engaging in discovery processes to meet goals. The discovery processes can lead to appropriate

resource mixes, and yield the best-possible efficiency outcomes.

The innately forward-looking behavioral remedies are to be preferred in generating long-

run sustainable dynamic efficiencies with sustainable large fiscal benefits. Hence, a managed

regulation framework, to implement behavioral remedies, oriented around outcomes and goals,

would significantly enhance consumer welfare. A fundamental challenge lies ahead in designing

such a framework to tackle modern technology-era contingencies.

134
The re-monopolization of the United States telecommunications sector, in less than two
decades after the so-called path-breaking structural separation reforms were put through in 1984,
is a stark example of rapid recidivism. See Majumdar, Moussawi & Yaylacicegi, supra note 39.
45
 Appendix: Basic Description of the DEA Models

This appendix contains a description of the data envelopment analysis (DEA) approach

for efficiency analysis. The basic DEA details have been extensively described. The standard

works 135 and compendium works 136 contain key details. The late Abraham J. Charnes, the late

William W. Cooper and Eduardo Rhodes 137 proposed a tractable model to measure composite

relative productive efficiency metrics in the case of economic or organizational entities, such as

firms, where multiple outputs and multiple inputs could be taken into account in these

calculations. The original Abraham Charnes, William Cooper and Eduardo Rhodes model 138

proposed that an entity minimize its inputs and assumed constant returns to scale (CRS). This

approach is further described.

The standard model assumes data on K inputs and M outputs on each of N firms or

entities. For the ith entity, these are represented by the xi and yi vectors respectively. The K*N

input matrix, X, and the M*N output matrix represent the data of all N entities. The purpose of

DEA is to construct a non-parametric envelopment frontier over the data points, so that all

observed points lie on or below the production frontier. The performance metric generated by

DEA analysis is an efficiency ratio of all the outputs over all the inputs, such as u'yi/v'xi, where u

is an M*1 vector of output weights and v is a vector of K*1 input weights. In selecting optimal

weights, a mathematical programming problem is specified:

Maxu,v (u'yi/v'xi)

135
Banker, Charnes & Cooper, supra note 59; Charnes, Cooper & Rhodes, supra note 59.
136
Cooper, Seiford & Tone, supra note 60; Lewin & Minton, supra note 60; Ray supra note 60.
137
Charnes, Cooper & Rhodes, supra note 59.
138
Charnes, Cooper & Rhodes, ibid.
46
subject to:

u'yj/v'xj ≤ 1, j = 1, 2, 3,……, N

u, v ≥ 0.

The algorithm involves finding values for u and v such that the efficiency measure of the

ith entity is maximized, subject to the constraint that all efficiency measures must be less than or

equal to 1. To avoid an infinitely large number of solutions, a constraint v'xj = 1 is imposed,

which provides:

Maxμ,ν (μ'νi),

subject to:

νxi = 1,

μ'yj - ν'xj ≤ 0, j = 1, 2, 3,……, N

μ, ν ≥ 0,

and the notation change from u to μ and v to ν reflects the transformation. This is the multiplier

form of the linear programming (LP) problem. Based on the duality in LP, an envelopment form

of the program can be expressed as:

Minθλ θ,

Subject to:

-yi + Yλ ≥ 0,

θxi - Xλ ≥ 0,

λ ≥ 0,

where θ is a scalar and λ is a N*1 vector of constants. The envelopment form involves fewer

constraints than the multiplier form (K + M < N + 1) and hence is a preferred solution. The value

of θ is an efficiency score for the ith entity and satisfies the condition that θ ≤ 1, with a value of 1
47
indicating a point on the frontier for an efficient firm. The LP problem is solved N times, once

for each entity, and a value of θ is generated for each entity relative to all other entities.

The Abraham Charnes, William Cooper and Eduardo Rhodes model 139 has been based on

CRS assumptions, which are likely to be empirically untrue since most firms would not be

operating at optimal scale because of organizational diseconomies and unobservable

incompetence. Hence, Abraham Charnes, William Cooper and Eduardo Rhodes’ model’s

efficiency metrics may be confounded by scale efficiency effects. 140 Thus, Rajiv D. Banker,

Abraham J. Charnes and William W. Cooper proposed a variable returns to scale (VRS) model

providing for a pure technical efficiency effect, stripped of scale efficiency effects. 141 The LP

problem with a CRS approach defined above is augmented with an additional constraint N1'λ =

1, in the VRS formulation, so that now the LP formulation is:

Minθλ θ,

Subject to:

-yi + Yλ ≥ 0,

θxi - Xλ ≥ 0,

N1'λ = 1,

λ ≥ 0,

where N1 is N*1 vector of ones. Rajiv Banker, Abraham Charnes and William Cooper’s model’s

VRS approach forms a convex hull of intersecting planes which envelop the data points more

139
Charnes, Cooper & Rhodes, supra note 59.
140
Banker, Charnes & Cooper, supra note 59.
141
Banker, Charnes & Cooper, ibid.
48
tightly than Abraham Charnes, William Cooper and Eduardo Rhodes’ model’s canonical hull, 142

and provide technical efficiency scores which are greater than or equal to those obtained using

the CRS approach. 143 The technical efficiency scores obtained using Abraham Charnes, William

Cooper and Eduardo Rhodes’ model’s CRS approach 144 can be decomposed into two

components: one due to intrinsic technical efficiency and the other due to scale inefficiency. 145

This process is carried out by calculating both VRS and CRS efficiency scores and if they are

different for an entity, the difference is due to scale inefficiency. A metric to measure extent of

scale efficiency is the scale efficiency score (SE Score) which is the CRS Score/VRS Score; or

the CRS Score = VRS Score*SE Score.

142
Charnes, Cooper & Rhodes, supra note 59.
143
Banker, Charnes & Cooper, supra note 59
144
Charnes, Cooper & Rhodes, supra note 59.
145
Banker, Charnes & Cooper, supra note 59.
49
 Table 1: Standard Differences among the Institutional Arrangements and Remedies

Antitrust or Competition
Regulation
Policy
A. Nature of
Structural Behavioral
Institutional Remedy
B. Ethos of the Ex-post policing, sanctions, Ex-ante sectoral evolution,
Institutional Agency enforcement and punishment performance, growth and
Handling Issue development
C. Characteristic of Industry and market macro Market and firm micro
Operating characteristics characteristics
Environment
Affected by Remedy
D. Outcome Impacted Structure of industry and market Conduct within the market by
changed or affected firms changed or affected
E. Frequency of One shot Continuous
Application of
Remedy
F. Broad Range of Firm Strategic actions of the firm in Operational actions of firms in
Actions Affected by positioning within an industry executing and implementing
Remedy and determining the scale and tasks within a market segment to
scope of the firm in a market generate efficiencies
segment
G. Explicit Business What activities to do and where How to do the activities and
Activities and Tasks to do the activities when to do the activities
Affected by Remedy
H. Typical Business Entry, exit expansion, integration Pricing, wages, quality,
Decisions Affected and diversification innovation and investment
I. Types and Sizes of Capital expenditures of larger Operating expenditures of
Expenditures value smaller value
Affected

50
Table 2: Analysis of Causal Effects of Structural Antitrust Remedy Measure on Efficiency

Outcome Variable Antitrust Outcome

Causal Effects of Antitrust
Basic Result
Measure
Column (A) Column (B) Column (C) Column (D)
Average Computed Percentage in Statistical
Efficiency Average Enhanced Significance
Value Treatment Effects Efficiency of Result
Yes
Productive Efficiency 0.763 0.017 2.23
(at 10%)

51
 Table 3: Analysis of Causal Effects of Regulatory Behavioral Remedy Measure on
Efficiency

Outcome Variable Regulatory Outcome

Causal Effects of Regulatory
Basic Result
Measure
Column (A) Column (B) Column (C) Column (D)
Average Computed Percentage in Statistical
Efficiency Average Enhanced Significance
Value Treatment Effects Efficiency of Result
Yes
Productive Efficiency 0.763 0.033 4.33
(at 5%)

52
 Table 4: Comparative Analysis of Impact of Antitrust versus Regulatory Remedies on
Efficiency

Performance Outcome Comparative Outcome Analysis of Antitrust Outcome

Variable Evaluated for (Structural) versus Regulatory (Behavioral) Statistically
Comparative Assessment Measures on Economic Performance Significant?
Regulatory (Behavioral) Measure Has a
Yes
Productive Efficiency Greater Impact on Calculated Efficiency
(at 5% or less)
than the Antitrust (Structural) Measure

53