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Extending cost subadditivity: Market size, fixed costs, and natural monopoly

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  • Kan, Kaili
  • Wang, Yonggang

Abstract

Cost subadditivity has long served as the foundation of the theory of natural monopoly and is often regarded as a sufficient condition. By integrating market size and fixed costs, this paper develops a framework that identifies when markets remain unserved, support a monopoly, or sustain competition, demonstrating that cost subadditivity alone is insufficient to determine market outcomes. This framework reinterprets natural monopoly as an outcome of structural feasibility rather than inherent industry characteristics. It applies across industries—from network industries to digital services—offering a unified basis for understanding market structure while suggesting new approaches to competition policy and regulation.

Suggested Citation

  • Kan, Kaili & Wang, Yonggang, 2026. "Extending cost subadditivity: Market size, fixed costs, and natural monopoly," Structural Change and Economic Dynamics, Elsevier, vol. 78(C), pages 151-159.
    • Handle: RePEc:eee:streco:v:78:y:2026:i:c:p:151-159
    DOI: 10.1016/j.strueco.2026.03.007
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