hout its early history the telephone network was widely regarded as a paradigmatic example of a natural monopoly. Concern that tele- phone companies would charge supracompetitive rates has long led state agencies (commonly known as public utility commissions) to regulate the rates for intra- state telephone service. The Communications Act of 1934 similarly mandated that the Federal Communications Commission (FCC) regulate the rates for interstate service as well. In addition, the supposed danger of wasteful duplication of fixed costs invest- ments led to the widespread belief that all telephone services needed to be provided by a single company, perhaps best exemplified by AT&T President Theodore Vail's call for "[o]ne policy, one system, and universal service" (AT&T 1911, pp. 18- 19). This rationale justified limiting entry by requiring that all providers obtain a certificate of public necessity and convenience, either from the state public util- ity commission (for local service) or from the FCC (for interstate service), before offering telephone service. 2. Network Economic Effects Another classic justification for regulating telecommunications networks is the presence of network economic effects. Network economic effects exist when the value of a network is determined not only by the access price charged, but also by the number of users connected to the network. The telephone system has long been regarded as a classic example of a network that exhibits such effects, because the value of a telephone network is determined in large part by the number of people with whom one can communicate through that network. The more people an individual subscriber can reach through the telephone network, the more valuable the network becomes. Network Regulation Basics The notion of network effects springs from "Metcalfe's Law," named after Robert Metcalfe, otherwise celebrated as the coinventor of the Ethernet protocol for network transmission technology. Recall from our earlier discussion in Chapter 1 that if all of the nno