An alternative to natural monopoly
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An alternative to natural monopoly Oriol Carbonell-Nicolau1 Accepted: 23 September 2020 / Published online: 1 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We consider a shared ownership arrangement among consumers/owners as a means to organize production with an underlying decreasing average cost function typical of natural monopolies. The resulting output allocation yields a lower deadweight loss than the monopoly allocation, and is, in some cases, efficient. Keywords Natural monopoly · Deadweight loss from monopoly · Decreasing average costs · Shared ownership JEL classification L12 · L13
1 Introduction According to a standard argument within the neoclassical economics tradition, an exclusive franchise to serve a market should be granted to a single firm in the presence of decreasing average costs of production (or, more generally, subadditive costs)—a situation commonly known as the case of a natural monopoly.1 This argument has undoubtedly contributed to the growing concentration of market power observed in the U.S. over the last forty years.2 Traditionally, the case for natural monopolies has focused on the potential welfare gains derived from low production costs at large-scale output levels from a sole vendor.3 Using a different approach, this paper makes a case against natural monopolies, based on the observation that decentralized choices under a joint ownership rule are welfare improving.
1 For the definition of subadditive costs, see, e.g., Braeutigam (1989). 2 See, e.g., Khan (2016). 3 This cost efficiency argument must account for the deadweight loss from monopoly, which acts as a
countervailing force. I wish to thank Tomas Sjöström, an anonymous referee, and the journal’s editor for valuable comments.
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Oriol Carbonell-Nicolau [email protected] Department of Economics, Rutgers University, 75 Hamilton St., New Brunswick, NJ 08901, USA
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While we abstract from institutional details on the implementation of shared ownership—and focus instead on its effects—some authors have suggested similar arrangements of local public ownership. For example, Ostrom (2010) advocates so-called “polycentric governance” as a way to escape the market-state dichotomy, emphasizing community-governed common-pool resources. Comparing private, community, and state governed common-pool resources, Grafton (2000) finds that “a common factor in ensuring successful governance of common-pool resources is the active participation of resource users in the management of the flow of benefits from the resource.” Some authors have argued that privatization of public utilities transfers public value to private interests, whose profit motive is not necessarily aligned with the needs of a broad base of customers.4 These and other considerations have led some to propose alternative structures for utility companies aimed at strengthening local public ownership, giving power back to communities (see, e.g., Milburn and Russell 2019). But p
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