AT&T's monopoly

I rather enjoy spending time in class exploding the myth that monopolies are created by excessive competition. In my lecture on the history of the telecommunications industry, I present the facts that destroy this myth, at least within the realm of AT&T's monopoly. In 1910s, Bell's second patent on the telephone had already expired. There were literally thousands of telephone companies in the U.S. at the time (always a shock to students). However, the U.S. government decided that AT&T should have a legal monopoly on all interstate telephone traffic. This essentially gave AT&T a competitive edge that no other telephone company could compete with. AT&T subsequently bought out or forced other companies to connect with their phone system, least they be marginalized. The result, AT&T controlled both the long distance and local telephone market.

On their exam, students must answer a question like the one below:
How did AT&T obtain a monopoly in long distance telephone service?
a) AT&T charged prices so high that no competitors could make enough profit to attract investors.
b) The federal government believed that communication was so important that AT&T should have a monopoly and regulated the market accordingly.
c) A band of outlaws enforced AT&T’s patents even after they officially expired.
d) None of the choices are correct.
The 1982 anti-trust case against AT&T was really one branch of government (federal court) telling another branch of government (FCC and congress) to stop supporting this monopoly. The consequences of this case is an entirely different matter.

When one focuses on the facts, it becomes obvious how real monopolies are created.


  1. If I had time and/or a crack research team I'd really love to write a book explaining the inner workings to every instance of this. It would be a best seller

  2. Very interesting, and I can see how it would be enjoyable to explode the monopoly myths.

    This didn't come out in your post, but do you directly address the difference between a free market monopoly and a coercive, government supported monopoly? I have found that when people don't understand the difference, they think simple competitive advantage gained by being really successful in a free market operates in the same way as government force.

    In your post, you seem to be saying that monopolies are created by government alone, but I don't think that's the case. Despite the fact that there were other competitors at the height of Standard Oil's dominance, it was true monopoly. Because it didn't have government backing, it was open to challenges and before it was busted, there were already signs that it would lose some of its dominant position to competitors. But the fact remains that it was a monopoly. (something like 90+% of the market)

    The most important distinction in the monopoly debate is between natural, free market dominance on the one hand, and a coercive, government-back monopoly that bars competitors from entering the market on the other. The former can hold onto its position only by constantly innovating, making products cheaper, faster, better, all the while not violating individual rights. The latter holds onto its position with the implied guns of the government thugs standing menacingly behind it.

  3. Great idea Tom. I would buy it.

    C. August,
    You are correct that I did not talk about the differences between free market monopoly and coercive, government supported monopoly. I did this in part because I cannot conceptually lump them together. While I acknowledge that many people consider free market monopolies the same as government supported monopolies, I do not (only the latter is the only true monopoly "one seller", the former is just a really successful business). Unfortunately, I do not have time in my class to tease out the difference in a way that is meaningful to the students. Although, in the future, I may use the anti-trust cases against IBM and Microsoft as examples of abuse that definition. On second thought, maybe I could. I'll have to give that some more thought. Thanks for the suggestion.

  4. I see what you're saying about not being able to lump coercive and free market monopolies together... precisely because they have a fundamental difference.

    My comments stem from the fact that I tried to put myself in the position of a student who--like nearly everyone in our culture--conflates the two into one incongruous concept that states "all big businesses are bad," without seeing the key distinction. It's the same reason people misidentified the causes during the Union Pacific/Credit Mobilier scandal in the 1870's, and even the recent financial crisis... they blame capitalism when it's government interference that is the root cause, and the proposed fix is greater government regulation.

    I know that for me, when I was in college all those many years ago and reading Ayn Rand's works for the first time, the differentiation between a coercive government monopoly and a free market one was the "A-ha!" moment for me, and was the concept that enabled me to draw a clear line separating AT&T, the electricity industry or the Union Pacific railroad, from Microsoft or Standard Oil.

  5. Great post. Keep it up. Students need this kind of education in the worst way. If only elementary and high school teachers, or even parents, would teach kids the difference between a monopoly achieved by force of government action and an earned monopoly achieved by free trade, the world would be a much better place.