The Pricing of Inputs Sold to Competitors

William J. Baumol & J. Gregory Sidak

11 Yale Journal on Regulation 171 (1994)


Local telephone companies have long been regulated as natural monopolies. However, technological innovation and the prospect of falling regulatory barriers to entry now expose some portions of the local exchange to competition from cable television systems. Nevertheless, it is probable that certain parts of local telephony will remain naturally monopolistic. In these cases the local exchange carrier must be permitted to sell necessary inputs to its competitors in the market for final telecommunications products at a price that reflects all its costs, including opportunity costs. The authors’ analysis applies to any network industry. Thus, it is useful in antitrust analysis of essential facilities and in regulatory analysis of transportation, energy transmission, pipelines, and mail delivery.

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