Economics
College of Humanities and Social Sciences

Federal Preemption and Deregulation of the United States Telegraph Industry

Aaron M. Honsowetz

Major Professor: John V.C. Nye, PhD, Department of Economics

Committee Members: Mark L. Koyama, Thomas W. Hazlett, David Mitch

Carow Hall, Conference Room
May 07, 2015, 12:00 PM to 09:00 AM

Abstract:

The 1866 Post Roads Act benefited consumers by using federal preemption to deregulate state and municipal telegraph regulations that increased the cost of entry and limited telegraph competition.  Historical empirical evidence indicates that the post 1866 telegraph market was contested and is consistent with the theory that the 1866 Post Roads Act contributed to increasing contestability and consumer welfare.  While the act benefited consumers, its successful passage was partly due to support from economic and political elites who stood to personally profit from its implementation.

 

Lowering Entry Barriers Created by State and Municipal Regulations with Federal Preemption

 

Pre-1866 state and municipal telegraph laws were barriers of entry.  I document what laws were preempted by the 1866 Post Roads Act, explain how these laws increased entry barriers, provide evidence that preemption was enforced, and calculate rough estimates of the decrease in entry costs from enforcement of the law.  The act granted a de facto national charter and franchise to build and operate a telegraph system anywhere in the United States to any telegraph company organized within any state.  The act also outlawed certain types of contracts that had prohibited other companies from acquiring telegraph right of way access. 

 

Federal Preemption and Competition in the Post 1866 United States Telegraph Market

 

The United States federal government preempted state telegraph regulations it deemed as anti-competitive by enacting the 1866 Post Roads Act.  This act granted a de facto national charter and franchise to build and operate a telegraph system anywhere in the United States to any telegraph company organized within any state.  The act also outlawed certain types of contracts that had prohibited other companies from acquiring telegraph right of way access.  I show that rival firms took advantage of the 1866 Post Roads Act to enter the telegraph market and compete with Western Union.  I provide the first empirical evidence indicating the post 1866 United States telegraph market was contested. 

 

Pro-Consumer Legislation Supported by Elites: The Curious Case of the 1866 Post Roads Act

 

Economic and political elites who anticipated benefiting from the 1866 Post Roads Act overcame the problem of collective action and passed pro-consumer legislation over the objections of a concentrated economic interest.  I provide evidence that without the support of economic and political elites, the pro-consumer 1866 Post Roads Act would have failed to pass the United States Congress or Senate.  The 1866 Post Roads Act benefited consumers by lowering the entry barriers for telegraph companies and was vigorously opposed by Western Union, who dominated the United States telegraph market in 1866.

 

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