The Impact Of Deming's Ideas: AT&T of Illinois v. Illinois Bell

["Jonathan Siegel" <jmsiegel@yahoo.com>]

In AT&T of Illinois v. Illinois Bell,
http://caselaw.lp.findlaw.com/data2/circs/7th/032735pv2.pdf the U.S. 7th
Circuit Court of Appeals adopted a line of reasoning that looks
remarkably similar to an important part of Deming's theory of economics.
The litigation arises under the 1996 telecommunications reform act,
which required existing local phone companies to sell services to new
entrants. Because there has been little agreement among the parties
about appropriate pricing, regulatory bodies and courts have stepped in.
A number have been adjudicating prices based on criteria remarkably
analogous to what Dr. Deming envisioned as the appropriate role of the
ICC in The New Economics. In this legal case, involving telephone
service in Illinois, a federal court of appeals explicitly endorsed the
idea that pricing needs to consider the cost of innovation and the
health of the telephone network, and explained why pricing should not be
set too low in order to maintain these goals. The case involved how to
set the rate between existing local telephone companies and new entrants
for "unbundled elements", components of phone service that can be put
together to form a complete service network.

It said:

"Prices for unbundled components affect not only the allocation of
income among producers but also investment and innovation: if the price
to rivals is too low, they won't build their own plant (why make capital
investments when you can buy for less, one unbundled element at a time?)
and the incumbents won't maintain or upgrade their facilities (why make
costly capital investments if you have to sell costly loops to rivals
for less than it would cost to produce them?)"

In other words, if the price were set too low, BOTH sellers AND buyers
would ultimately be hurt, and in addition, research, development, and
even maintenance of existing service would be degraded, and the industry
as a whole - consumers included - would ultimately suffer. A higher
price can be in everyone's best interest. The court said explicitly that
this is because pricing is "not only the allocation of income among
parties"; it is a nonzero-sum game, and "investment and innovation" are
key effects of its nonlinear nature. 

We forget just how far the law has come since Dr. Deming was born. In
1916, Henry Ford lost a famous legal case when the Dodges insisted that
he pay them the maximum dividend possible, and the courts ordered Ford
to do so. Ford's argument that the law should consider more than
maximizing immediate quarterly dividends -- that a business also has to
consider research and innovation, and investment in its employees and
future -- fell on deaf ears. It was considered a corporation's duty to
pay the maximum dividend possible each quarter, and that was that. 

The law has truly come a long way. 

Sincerely,

Jonathan Siegel
(734) 657-1900
jmsiegel@yahoo.com