 merchants. Thus, the elimination of competition provided few benefits to consumers. Instead, the Bell System's arguments are better understood as part of what Gabel (1969, p. 358) has described as a deliberate "flight from competition." By 1907, the corporate leadership of the Bell System acknowledged that its initial strategy of trying to expand its network, cut rates, and refuse to interconnect with the inde- pendents was a colossal failure. The price cuts had a devastating effect on the Bell System's profitability, with revenue dropping from $88 per subscriber in 1905 to $43 per subscriber in 1907. Establishing local telephone service in the areas it did not yet serve required enormous amounts of capital, which the Bell System struggled to raise. Committed as the Bell System was to a business strategy centered on long distance, service provided by it required higher-quality equipment, which in turn made its local telephone networks more costly than the independents'. In contrast, the independent companies were able to construct systems at lower cost financed largely by local sources of capital raised by local residents who were able to leverage preexisting business relationships. Interconnecting with adjacent local systems allowed the independent telephone companies to establish regional long-distance networks that were just as effective for short-haul toll calling as the Bell System. Spurred into a race for the market, both the Bell System and the independents began investing heavily in expanding their networks. As noted earlier, annual growth rates more than tripled and by 1907 the independent telephone industry had achieved parity with the Bell System in terms of total subscribers and competed with Bell in 59 percent of cities. At this point, if the independents had coordinated their activity, they could have defeated whatever advantage AT&T might have gained by its refusal to interconnect simply by banding together to form a network of equal size. The failure of its initial response led the Bell System to