Divestiture of Nippon Telegraph and Telephone

This article discusses whether the Japanese government should break up NTT (Nippon Telegraph & Telephone) in 1995, as the US federal government compelled AT&T (American Telephone & Telegram) to break itself into toll and local telephone companies in 1984. The divestiture of NTT has long been a major industrial policy issue in Japan since the common carrier was privatized in 1985. The governmental decision to divest it may influence not only the Japanese telecommunications infrastructure, but also the global telecommunications and information industries in the world, where many common carriers are now facing an environmental change from regulation to competition. A unique feature of this study is that it employs eight different estimation techniques to obtain a cost function of NTT, so that this research avoids a methodological bias occurring in many empirical studies. This study confirms that NTT has maintained cost subadditivity, but it has failed to establish the status of a natural monopoly in the observed time period. However, it also finds that the NTT divestiture will not produce a price-reducing benefit to Japanese telecommunications consumers. This research result will serve as empirical evidence for guiding the governmental review of this large-scale industrial policy issue in Japan.