Was the Bell system a natural monopoly? An application of data envelopment analysis

Examination of the relation between scale economies and natural monopoly has been a central issue in public policy research. The paper employs Data Envelopment Analysis (DEA) methodology to re-examine the issue of natural monopoly for the Bell system with annual time series data for 1947–1977. Results from the DEA-based statistical tests reveal the prevalence of increasing returns to scale for the Bell system, implying that there were economies of scale for the Bell system. This evidence suggests that the Bell data were indeed consistent with a natural monopoly. Further, the results indicate that the low level of overall efficiency primarily results from allocative inefficiency rather than technical and scale inefficiency.