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Free Entry and the Sustainability of Natural Monopoly

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  • John C. Panzar
  • Robert D. Willig
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    Abstract

    Contrary to conventional wisdom, a regulated natural monopoly may be 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 unsustainability 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.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 8 (1977)
    Issue (Month): 1 (Spring)
    Pages: 1-22

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    Handle: RePEc:rje:bellje:v:8:y:1977:i:spring:p:1-22

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    Cited by:
    1. Edward M. Iacobucci & Michael J. Trebilcock & Tracey D. Epps, 2007. "Rerouting the Mail: Why Canada Post is Due for Reform," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 243, February.
    2. Iehlé, Vincent, 2008. "Sustainability in a multiproduct and multiple agent contestable market," MPRA Paper 13013, University Library of Munich, Germany.
    3. Wayne Y. Lee & Anjan V. Thakor, 2004. "Regulatory Pricing and Capital Investment under Asymmetric Information about Cost," Finance 0411022, EconWPA.

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