This paper argues that, even in the presence of decreasing average costs of production, monopolies can sometimes be avoided in the interest of market efficiency. It is shown that under certain conditions on the variable cost of production, there is an alternate, viable market structure that reduces the well-known deadweight loss of monopoly: An "upstream" market in which one or more firms own and share the fixed cost of creating and maintaining a distribution network, and a "downstream" market populated by a large number of firms that are charged a unit price for the network's usage.
All Science Journal Classification (ASJC) codes
- Economics, Econometrics and Finance(all)
- Cournot competition
- deadweight loss of monopoly
- natural monopoly