Long Distance Demand: A Point-to-Point Model*

The 1980s mark a new era in the communications industry. A combination of technological advances and political and economic trends toward deregulation will have a considerable impact upon the industry and consumers. As a result of the development of alternative forms of communication, there is an increased awareness of costs and pressure to set prices in line with these costs in order to maximize consumer benefits and to end present patterns of cross subsidization. The entry of firms in the newly unregulated markets (terminal equipment, long distance) should begin to affect the profits and behavior in related regulated markets. Consequently, the future of telecommunications is changing rapidly, especially in light of the recent AT&T divestiture decision. In the not-too-distant past, the telecommunications industry was fully regulated and regarded by most as a "natural monopoly," but changes in technology (e.g., satellite communications, digital electronic equipment, computers, etc.) are revolutionizing the industry and have meant improved and expanded services to the consumer as well as lower costs. These new developments in technology are altering the traditional "natural monopoly" arguments. Various firms have successfully challenged the Bell System's monopoly position in several telecommunications markets.' In these cases (Carterfone, MCI, etc.), the Bell System argued that competition would reduce the quality of telecommunication services (i.e., the system's integrity was threatened) and, in addition, would erode the revenues that have been used in the past to subsidize other services (primarily residential local exchange) for which they would still be responsible. That is, Bell invoked the "cream-skimmers'" argument. The potential entrants' positions, in contrast, were that increased competition will benefit the consumer by increasing consumers' options, reducing monopoly power, and thereby reducing prices and increasing output (services). This latter argument prevailed and