Case Study
The breaking up of the Bell System provides an informative case study on the importance of cost modeling and, more importantly, the choice of an appropriate specification. The motivation of this chapter stems from the recent surge to deregulate what were thought to be naturally monopolistic industries. The essence of natural monopoly is discussed; more specifically, the characteristics of and the tests for a market are examined. The chapter posits the idea that economies of vertical integration, which are mathematically equivalent to economies of scope, could be used to establish that a market is a natural monopoly and shows the parallels between telephony and electricity, which motivates the conclusions drawn and lessons learned in the final section. This chapter provides an overview of what transpired in the telecommunications industry in the latter part of the twentieth century.