gulation with every increase in the Network Regulation Basics portions of the telephone network that became open to competition. In addition, it would require limiting the regulated entity to providing only those services that were inherently uncompetitive. The traditional approach would support isolating local loops into a separate company (sometimes called a "Loop Co."), requiring that it offer nondiscriminatory access to any requesting parties, and prohibiting its offering any other services. Indeed, the FCC entered into serious discussions at some point to pursue just such a solution. Over time, however, policy makers began to exhibit greater appreciation for the insights of the theory of the firm (discussed at greater length in Chapter 5) and to acknowledge the potential benefits of combining certain functions within the boundary of a single firm. This in turn suggests that there may be a natural limit to policy makers' ability to keep narrowing the scope of activities permitted to take place within a regulated entity. In fact, forcing a telephone company to externalize certain functions can create significant costs and disrupt the firm's natural boundaries, whereas permitting telecommunications companies to offer some services on an integrated basis can give rise to efficiencies that may make integrated provision the preferred second-best alternative. The FCC explicitly recognized that structural separation can create substantial costs with respect to information services. The issue first arose during the second Computer Inquiry, in which the FCC recognized that the costs of structural sep- aration weighed particularly heavily on smaller carriers, which possessed smaller subscriber bases over which to amortize the costs of managing a separate sub- sidiary. Smaller carriers nonetheless retained bottleneck control over a resource upon which information service providers depended, albeit with a reduced total incentive because of the smaller size of their market. The FCC responded to the higher costs of structu