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The Role of Competition in Natural Monopoly: Costs, Public Ownership, and Regulation

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  • John Kwoka

Abstract

Conventional policy for industries with very high economies of scale is to permit monopoly but to subject it to regulation or public ownership. Since the latter may not result in cost minimization, however, it is possible that competition, by forcing firms to operate at the cost frontier, may be less costly despite sacrificing some scale economies. The paper sets out the relevant analytical considerations, estimates a cost function for electric distribution utilities in the U.S., and tests for the relative costs of monopoly and duopoly utilities. Among other notable findings, it concludes that competition does indeed lower net costs. Copyright Springer 2006

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  • John Kwoka, 2006. "The Role of Competition in Natural Monopoly: Costs, Public Ownership, and Regulation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 127-147, September.
    • Handle: RePEc:kap:revind:v:29:y:2006:i:1:p:127-147
    DOI: 10.1007/s11151-006-9112-x
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    References listed on IDEAS

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    Cited by:

    1. Kristof De Witte & Elbert Dijkgraaf, 2007. "Mean and Bold?," Tinbergen Institute Discussion Papers 07-092/3, Tinbergen Institute.
    2. Bortolotti, Bernardo & Cambini, Carlo & Rondi, Laura, 2013. "Reluctant regulation," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 804-828.
    3. Johan WILLNER & Sonja GRÖNBLOM, 2011. "Reforming a network industry: consequences for cost efficiency and welfare," Departmental Working Papers 2011-33, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    4. Amaro Olimpio Pereira & Rafael Cancella Morais & Bruno S. L. Cunha & Maria Bernadete Gomes Pereira Sarmiento Gutierrez & Mario Jorge Cardoso de Mendonça, 2023. "Allocative Efficiency towards Energy Transition: The Cases of Natural Gas and Electricity Markets," Energies, MDPI, vol. 16(2), pages 1-17, January.
    5. Cullmann, Astrid & Stiel, Caroline, 2022. "Cost and productivity effects of demographic changes on local water service," Utilities Policy, Elsevier, vol. 79(C).
    6. Ryan P. Scott & Tyler A. Scott & Robert A. Greer, 2022. "Who owns the pipes? Utility ownership, infrastructure conditions, and methane emissions in United States natural gas distribution," Review of Policy Research, Policy Studies Organization, vol. 39(2), pages 170-198, March.
    7. Cullmann, Astrid & Stiel, Caroline, 2022. "Cost and productivity effects of demographic changes on local water service," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 79, pages 1-35.
    8. Cátia Felisberto, 2012. "The Relationship Between Competition and Incumbent’s Innovation," Journal of Industry, Competition and Trade, Springer, vol. 12(1), pages 21-46, March.
    9. Fumagalli, Elena & Garrone, Paola & Grilli, Luca, 2007. "Service quality in the electricity industry: The role of privatization and managerial behavior," Energy Policy, Elsevier, vol. 35(12), pages 6212-6224, December.
    10. K De Witte & E Dijkgraaf, 2010. "Mean and bold? On separating merger economies from structural efficiency gains in the drinking water sector," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(2), pages 222-234, February.
    11. Mark A. Jamison, 2011. "Liberalization and Regulation of Telecoms, Electricity, and Gas in the United States," Chapters, in: Matthias Finger & Rolf W. Künneke (ed.), International Handbook of Network Industries, chapter 21, Edward Elgar Publishing.
    12. Bloemhof, Barb, 2017. "Assessing consumer benefits in the Ontario residential retail natural gas market: ontario residential retail natural gas market: Why marketer entry did not help," Energy Policy, Elsevier, vol. 109(C), pages 555-564.

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