Review of Industrial Organization 13: 613–615, 1998.
Universal Service: Competition, Interconnection, and Monopoly in the Making of
the American Telephone System. Milton L. Miller, Jr. Cambridge MA: The MIT
Press and Washington, DC: The AEI Press, 1997, 213 pages, $40.
“Universal service” in the telephone industry has at least two working deﬁnitions.
The deﬁnition most familiar in current circles refers to universal connectedness, or
connecting all households to the nationally interconnected telephone network. The
most critical issue in such an endeavor is to provide basic telephone service at a
“reasonable” monthly rate to all U.S. citizens. The less known deﬁnition of univer-
sal service was coined by Theodore Vail, then president of AT&T, in 1907, referring
to a uniﬁed (national) telephone system controlled by one company, AT&T. The
primary difference between these two working deﬁnitions is interconnectedness.
The author’s intent with this work is to highlight the contrast in these two def-
initions, place the early deﬁnition in historical context, and map out the transition
of this market from one of access competition (which made the original deﬁnition
of universal service a goal of AT&T) to one of regulated monopoly, then to price
competition in an interconnected system (making the recent deﬁnition a more use-
ful one). The greatest portion of the book is devoted to placing the early deﬁnition
of universal service in historical context.
The author demonstrates a thorough knowledge of the institutional history of
telephony and a keen ability to analyze this history from an economic perspective.
Of particular interest is the use of economies of scale and scope in his discussion
of AT&T’s growth. Both AT&T and the independents learned early on that local
telephone service did not possess economies of scale in production. The larger the
number of subscribers, the higher the per unit cost. Per unit costs are increasing in
the number of subscribers because the number of possible connections increases
exponentially, thus, the capital equipment necessary to sustain a larger customer
base increases rapidly. Why then, would the U.S. government sanction a regulated
monopoly of telephones? The issue is one of user connectedness.
Miller identiﬁes “demand-side” economies of scope. As the number of sub-
scribers increases, the attractiveness and usefulness of the service increases. Why?
Early telephone services were not interconnected and local service exhibited tremen-