Perfect Competition versus Pure Monopoly 335services across the geographic regions of the country. Customarily, local author-
ities granted a legally protected monopoly to a single cable company.
Regulators argued for a single provider on the grounds of natural monopoly.
By building a single network to serve all households, the cable monopolist
would enjoy significant economies of scale, allowing it to deliver low-cost serv-
ices to subscribers. During this time, many cable companies were largely unreg-
ulated and were shielded from competition. Not surprisingly, they tended, over
time, to raise monthly fees for basic services.
Economic analysis is useful in exploring the alternatives of regulation and
competition in the ever-expanding domain of telecommunications. If one
believes that telecommunications has the economic features of a natural
monopoly, then granting one firm a regulated monopoly to provide services
over a single network is the appropriate response. Alternatively, if one believes
competition to be viable in telecommunications, regulatory effort should be
aimed at removing all entry barriers. Telecommunication companies, cable
firms, satellite operators, telecom-cable merged companies, and other firms
should all be allowed to offer competing services. Competition might mean
the creation of multiple networks in each service area. Or, if economies of scale
are important, it might mean a single broadband network, with the control-
ling firm obligated to allow access to any multimedia company.
Over the last decade, the advent of deregulation and the development of
advanced telecommunications services have reduced monopoly barriers and
greatly increased competition.^7 Today, local telephone services are provided
by the Baby Bells, long-distance companies, Internet companies, and cable
companies. The same companies plus independent firms offer long-distance
services. Network broadcasters, cable companies, and satellite operators pro-
vide television services. Cable, DSL, and dial-up services offer Internet con-
nectivity. Telecommunication companies of all stripes provide cellular and
wireless communications. (However, cellular firms must acquire the necessary
spectrum licenses to provide these services.) In short, a host of firms (coming
from different original markets) are competing to offer the most attractive
bundled services to consumers—Internet services, hundreds of television chan-
nels, movies on demand, and so on.
There is much evidence supporting the viability of competition. For
instance, in jurisdictions where multiple cable firms compete, economic studies
have found that subscribers on average pay two to three dollars less per month
than in jurisdictions with a monopoly provider of comparable services. (Indeed,
some studies indicate that the degree of competition is more important than
firm costs in explaining cable prices.) The availability of competing substitutes,
such as satellite providers, also induces lower cable prices. (In the same way,(^7) For a history and economic analysis of telecommunications markets, see N. Economides,
“Telecommunications Regulation: An Introduction,” in R. R. Nelson (Ed.),The Limits and
Complexity of Organizations(New York: Russell Sage Foundation Press, 2005).
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