Free Entry and the Sustainability of Natural Monopoly

Contrary to conventional wisdom, a regulated natural monopoly maybe vulnerable to entry by uninnovative competitors even if it is producing and pricing efficiently and earning zero economic profits. The causes and consequences of this unsustain ability are theoretically examined in an idealized regu...

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Bibliographic Details
Published in:Bell Journal of Economics 1977-04, Vol.8 (1), p.1-22
Main Authors: Panzar, John C., Willig, Robert D.
Format: Article
Language:English
Subjects:
Average cost
Environmental regulation
Market prices
Monopolies
Monopoly
Natural monopolies
Price regulation
Price vector
Regulation
Sustainability
Sustainable economies
Sustainable markets
Sustainable products
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Summary:Contrary to conventional wisdom, a regulated natural monopoly maybe vulnerable to entry by uninnovative competitors even if it is producing and pricing efficiently and earning zero economic profits. The causes and consequences of this unsustain ability are theoretically examined in an idealized regulatory environment. In particular,strong demand substitution effects and product-specific scale economies work against sustainability. If natural monopoly is unsustainable, no regulated market structure which provides the entire product set can be sustainable.
ISSN:0361-915X
0741-6261
2326-3032
1756-2171
DOI:10.2307/3003484