He then developed cost concepts for multi-product firms that allow a better understanding of the conditions that give rise to natural monopoly. Panzar and Willig studied the sustainability of a firm; that is, can a firm charge prices for its outputs that will thwart competitive entry.
Rail as a natural monopoly and possibilities of its regulation
And Baumol, Panzar and Willig introduced contestability, a measure of the ease with which new firms can enter an industry. The work of these authors and others has led to a reevaluation of the market and technological conditions that justify when a natural monopoly should or should not be regulated. Unable to display preview.
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Natural Monopoly Definition
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A natural monopoly exists in a particular market if a single firm can serve that market at lower cost than any combination of two or more firms. Natural monopoly arises out of the properties of productive technology, often in association with market demand, and not from the activities of governments or rivals see monopoly.
source url We see the need for a subsidy in Figure At this price, however, the average total cost exceeds the price, so that a firm with such a regulated price would lose money. There are two alternatives.
Efficiency In Natural Monopolies
The product could be subsidized: Subsidies are used with postal and passenger rail services in the United States and historically for many more products in Canada and Europe, including airlines and airplane manufacture. Alternatively, regulation could be imposed to limit the price to p 2 , the lowest break-even price. This is the more common strategy used in the United States.
There are two strategies for limiting the price: price-cap regulation Price-limiting strategy that directly imposes a maximum price. Both of these approaches induce some inefficiency of production. In both cases, an increase in average cost may translate into additional profits for the firm, causing regulated firms to engage in unnecessary activities.
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