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 originally 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?