Line-of-business restriction

A line-of-business restriction is a regulatory or antitrust constraint that prohibits a firm from operating in certain markets or engaging in certain activities, regardless of whether it possesses market power in those markets. Unlike structural separation, which divides a firm into independent entities, a line-of-business restriction permits the firm to remain whole but limits the scope of its operations.

Line-of-business restrictions were a central feature of the Modified Final Judgment that broke up AT&T: the seven Regional Bell Operating Companies were prohibited from manufacturing telecommunications equipment and from providing long-distance service. The theory was that local telephone service remained a natural monopoly while equipment manufacturing and long-distance service were potentially competitive, and that the Baby Bells should not be permitted to leverage their local monopolies to dominate these adjacent markets.

The distinction between structural separation and line-of-business restrictions is one of degree rather than kind. Both seek to prevent the cross-subsidization and strategic leveraging that integration enables. But line-of-business restrictions are more fragile: they depend on ongoing regulatory enforcement, they create incentives for regulatory evasion through corporate restructuring, and they can be lifted by political pressure — as indeed they were, when the Telecommunications Act of 1996 relaxed the restrictions and the subsequent wave of mergers effectively eliminated them.

The line-of-business restriction is the behavioral remedy dressed in structural clothing. It recognizes that architecture matters but lacks the courage to redesign it.