"Why must the unregulated market outcome be monopoly price? The competitiveness of the bidding process depends very much on such things as the number of bidders, but there is no clear or necessary reason for production scale economies to decrease the number of bidders. Let prospective buyers call for bids to service their demands...There can be many bidders and the bid that wins will be the lowest. The existence of scale economies in the production of the service is irrelevant to a determination of the number of rival bidders. If the number of bidders is large or if, for other reasons, collusion among them is impractical, the contracted price can be very close to per-unit production cost," (p.57).

"Specifically, three forces drove the monopolization process:

1. The intentional elimination of what was considered wasteful or duplicative competition through exclusionary licensing policies, misguided interconnection edicts, protected monopoly status for dominant carriers, and guaranteed revenues for those regulated utilities;
2. The mandated social policy of universal telephone entitlement, which implicitly called for a single provider to easily carry out regulatory orders; and;
3. The regulation of rates (through rate averaging and cross-subsidization) to achieve the social policy objective of universal service. The combined effect of those policies was enough to kill telephone competition just as it was gaining momentum," (pp.267-268).

"[T]elephone service traditionally has required laying an extensive cable network, constructing numerous call switching stations, and creating a variety of support services, before service could actually be initiated. Obviously, with such high entry costs, new firms can find it difficult to gain a toehold in the industry. Those problems are compounded by the fact that once a single firm overcomes the initial costs, their average cost of doing business drops rapidly relative to newcomers," (p.268)

"Overlooked in the textbooks is the extent to which federal and state governmental actions throughout this century helped build the AT&T or 'Bell system' monopoly...Despite the popular belief that the telephone network is a natural monopoly, the AT&T monopoly survived until the 1980s not because of its naturalness but because of overt government policy...Once the government allowed this monopoly to develop with its assistance, AT&T's strength could not be matched by any competitor, resulting in a monopolistic market structure that survived well into the 1980's," (pp.268-269).

"Despite AT&T’s rapid rise to market dominance, independent competitors began springing up shortly after the original patents expired in 1893 and 1894. These competitors grew by servicing areas not served by the Bell System, but then quickly began invading AT&T’s turf, especially areas where Bell service was poor...By 1907, non-Bell firms continued to develop and were operating 51 percent of the telephone businesses in local markets. Prices were driven down as many urban subscribers were able to choose among competing providers...Whereas AT&T had earned an average return on investment of 46 percent in the late 1800s, by 1906 their return had dropped to 8 percent," (p.270).

"After seventeen years of monopoly, the United States had a limited telephone system of 270,000 phones concentrated in the centers of the cities, with service generally unavailable in the outlying areas. After thirteen years of competition, the United States had an exten- sive system of six million telephones, almost evenly divided between Bell and the independents, with service available practically anywhere in the country," (p.271)

"[CEO Theodore] Vail’s most important goals upon taking over AT&T were the elimination of competitors, the befriending of policymakers and regulators, and the expansion of telephone service to the general public...AT&T adopted a new corporate slogan as part of an extensive advertising campaign: “One Policy, One System, Universal Service" ... Vail began acquiring a number of independent telephone competitors, as well as telegraph giant Western Union. However, the government made it known quickly that such activity was suspect under existing antitrust statutes," (p.272).

"Vail decided to enter an agreement that would appease governmental concerns while providing AT&T a firm grasp on the industry. On December 19, 1913, the “Kingsbury Commitment” was reached...the agreement outlined a plan whereby AT&T would sell off its $30 million in Western Union stock, agree not to acquire any other independent companies, and allow other competitors to interconnect with the Bell System...[and] require[d] that an equal number [of telelphones] be sold to an independent buyer for each system AT&T purchased...This provision allowed Bell and the independents to exchange telephones in order to give each other geographical monopolies. So long as only one company served a given geographical area there was little reason to expect price competition to take place...interconnection...eliminated the independents' incentive to establish a competitive long-distance system" (pp.272-273).

"Legislators began referring to competition in the same terms as Vail—'duplicative,' 'destructive,' and 'wasteful'...[The] prevailing [government] sentiment [was that], 'Competition resulted in duplication of investment.... The policy of the state was to eliminate this by eliminating as far as possible, duplication.' Many state regulatory agencies began refusing requests by telephone companies to construct new lines in areas already served by another carrier and continued to encourage monopoly swapping and consolidation in the name of 'efficient service'" ... "Vail chose at this time to put AT&T squarely behind government regulation, as the quid pro quo for avoiding competition. This was the only politically acceptable way for AT&T to monopolize telephony..." (p.274).

"On August 1, 1918, in the midst of World War I, the federal government nationalized the entire telecommunications industry for national security reasons...The federal government...agreed to pay to AT&T 4.5 percent of the grossoperating revenues of the telephone companies as a service fee; to make provisions for depreciation and obsolescence at the high rate of 5.72 percent per plant; to make provision for the amortization of intangible capital; to disburse all interest and dividend requirements...Finally, AT&T was given the power to keep a constant watch on the government’s performance..." (p.275-276).

"In addition, once the nationalized system was in place, AT&T wasted no time applying for immediate and sizable rate increases. High service connection charges were put into place for the first time. AT&T also began to realize it could use the backing of the federal government to coax state commissions into raising rates. In addition, once the nationalized system was in place, AT&T wasted no time applying for immediate and sizable rate increases. High service connection charges were put into place for the first time. AT&T also began to realize it could use the backing of the federal government to coax state commissions into raising rates...By January 21, 1919, just 5.5 months after nationalization, longd istance rates had increased by 20 percent," (p.276-276).

"During this period of government ownership, the decision was made to set standard long-distance rates throughout the country, based on average costs, In other words, subscribers calling from large cities would pay above costs in order to provide a subsidy to those in rural areas. So, early in the century cross-subsidization began, embraced by the industry...The intention of this action was obvious—Vail’s vision of a single, universal service provider was being adopted and implemented by the government through discriminatory rate structuring," (p.276-277).