Y’all should check out chapter 6 of the annual report of the Council of Economic Advisors, which is on Innovation and the Information Economy. The CEA issued the report this month, but I haven’t read much on it, other than a recent PFF blog posting.
The report has a good discussion on contestability theory in telecom:
However, natural monopoly does not necessarily mean economic regulation is needed to protect consumers from monopoly prices. While natural monopoly means that competition in the field is unlikely to arise, there could still be vigorous competition for the field–that is, competition among firms to attain the position of monopolist.
I’ve never thought there was anything “natural” about having one company be the phone service provider for the entire country.
Ma Bell scrupulously developed a public-relations strategy to persuade both customers and the government that the telephone system was a “natural monopoly.” In exchange for reasonable profits, it would provide efficient, reliable and uniform service.
It was a regulatory game.