For many years, AT&T was a regulated monopoly, providing both local and long-dis
ID: 1250246 • Letter: F
Question
For many years, AT&T was a regulated monopoly, providing both local and long-distance telephone service.a. Explain why long-distance phone service was orginally a natural monopoly.
b. Over the past two decades, many companies have launched communication satellites, each of which can transmit a limited number of calls. How did the growing role of satellites change the cost structure of long-distance phone service?
After a lengthy legal battle with the government, AT&T agreed to compete with other companies in the long-distance market. It also agreed to spin off its local phone service into the "baby bells" which remain highly regulated.
c. Why might it be efficient to have competition in long-distance phone service and regulated monopolies in local phone service?
Explanation / Answer
a. Long-distance phone calls require some type of infrastructure (long-distance phone lines in the past, satellites in the modern world) to relay messages. It's too costly for every competitor to string their own phone lines or to launch their own satellite --- economically, it makes sense for just *one* company to invest in this cost. The one company that makes this investment becomes a "monopoly", but we call it a "natural monopoly" because there were no artificial barriers to entry. b. As more companies find it worthwhile to launch satellites, the market for long-distance telephone calls becomes more competitive. This reduces the price to considers, and it increased their demand for telephone services. c. Long-distance calls might become competitive because every company is willing to launch a satellite, while local calls remain monopolistic because not every company is willing to string telephone wires to every house. Since there's still this big set-up cost (of installing wires) for anyone to enter the local market, local telephone services remain a "natural monopoly". It makes sense for the government to regulate natural monopolies.
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