How Efficient is a Contestable Natural Monopoly?

Arbeitspapier

This paper considers the efficiency of a contestable natural monopoly if consumers are heterogeneous and the monopolist can differentiate prices imperfectly. With restricted entry, the standard result in this case is that the monopoly offers a menu of price-quantity combinations which leads to the well-known 'no-distortion-at-the-top` pricing. Low demand consumers are induced to consume less than their first-best quantity, while high demand consumers buy a quantity where their marginal willingness to pay equals marginal cost. The paper shows that this type of inefficiency may also appear in a contestable market. Depending on cost and demand structures, first best efficiency can al so be a sustainable equilibrium. However, due to the existence of a continuum of equilibria, first best efficiency is never guaranteed. Most notably, even a stable 'distortion-at-the-top' result is possible.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 186

Classification and Topics

• Classification: Wirtschaft
• Subject: Natural Monoply ; Contestability ; Contract Theory

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Weichenrieder, Alfons
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 1999

Further information

• Handle: http://hdl.handle.net/10419/75658
• Last update: 10.03.2025, 11:42 AM CET