Monopoly and Market Power
Factors Leading to Monopoly
Core References
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 15.
Baldwin, Robert, and Martin Cave
Explains cost-based definition of a natural monopoly that produces a single product. Provides practical illustrations and describes pricing implications.
Fundamentals of Economic Regulation
Working Paper 03-17, Public Utility Research Center, University of Florida, 2003.
Berg, Sanford V
Explains that an industry is a natural monopoly if a single firm can serve the market at a lower cost than multiple firms.
Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.
Explains economics of vertical and horizontal market structure, with emphasis on telecommunications markets.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapter 4.
Kahn, Alfred
Explains that natural monopoly is a situation where the potential economies of scale in an industry are so pervasive that the best way to take advantage of them is to have one firm serve the entire market. Further states that it may be that these economies of scale are not achieved efficiently; rather, they may result from imperfect regulation or a lack of incentives for the firm to operate efficiently.
Principles of Transport Economics
North Hampton, Massachusetts: Edward Elgar Publishing Company, 2004.
Quinet, Emile and Roger Vickerman
Discusses the causes of natural monopolies in transport – economies of scale and scope, network economics and the need for expensive and lumpy infrastructure. Issues addressed include geographical fragmentation, horizontal separation and vertical separation. Explains the role of competition as a means of control of monopoly. Topics included are fringe competition, comparison competition and conditions of network access.
Other References
Cross-Subsidization: Pricing in Public Enterprises
American Economic Review 65: 1975, pp. 966-977.
Faulhaber, G.
Seminal paper on cost-based definition of natural monopoly for a multi-product firm. Uses technical economics.
Industry Structure and Pricing: The New Rivalry in Infrastructure
Norwell, MA: Kluwer, 1999, Chapter 3.
Jamison, Mark A.
Supplements Faulhaber’s work with the idea that firms from other markets may be able to enter the monopoly market and compete for at least some of the customers.
Key Words
Monopoly, Natural Monopoly, Economies of Scale, Economies of Scope, Cost Subadditivity
Pricing Under Monopoly – Efficiency Aspects and Cost Recovery
Note: Readers should cross-reference this section with Tariff Design.
Core References
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 15.
Baldwin, Robert, and Martin Cave
Explains cost-based definition of a natural monopoly that produces a single product. Provides practical illustrations and describes pricing implications.
The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapter 4.
Kahn, Alfred
Explains that natural monopoly in a single product implies decreasing average costs. Decreasing average costs can arise from several factors, but should not be confused with costs decreasing over time. Marginal cost pricing, in the presence of decreasing average costs, results in revenues that do not cover total cost. Solutions to this problem include price discrimination and subsidies.
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapters 4 and 11.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
Describes how monopolists restrict output, which results in a deadweight loss relative to perfect competition. Explains that marginal cost pricing, in the presence of decreasing average costs, results in revenues that do not cover total cost. Solutions to this problem include non-linear pricing, Ramsey pricing, subsidies, franchise bidding, price discrimination, and public ownership.
Basic Economics of Network Industries
Core References
Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999, Chapter 16.
Baldwin, Robert, and Martin Cave
Explains the choice between monopoly and competition. Considers the factors that determine which market structure may be more desirable and transitions from monopoly to competition.
Fundamentals of Economic Regulation
Working Paper 03-17, Public Utility Research Center, University of Florida, 2003.
Berg, Sanford V
Explains that infrastructure industry networks consist of links, nodes, and branches, with heavy fixed costs associated with each point. Competition may be feasible in the market, but even with natural monopoly competition is feasible for the market.
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapter 11.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
Describes cost structure of traditional utility services.
Sectoral References
ELECTRICITY
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapter 2.
Hunt, Sally
Describes the traditional physical functions in the electricity industry, namely generation (production), transmission, system operations, and distribution. Explains each function. Further explains that electricity is different from other commodities in that it cannot be stored, it takes the path of least resistance, and transmission of power over the network is subject to complex series so that what happens in one place can affect the network many miles away.
GAS
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapter 18.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
Describes cost characteristics of oil and natural gas and the regulation of natural gas.
TELECOMMUNICATIONS
The Economics of Networks
International Journal of Industrial Organization 14 (6), October 1996, pp. 673-699. Available at http://www.stern.nyu.edu/networks/site.html.
Economides, Nicholas
Provides a summary of the economics of networks. Explains network externalities in telecommunications, including their sources and their effects on pricing and market structure. Examines issues of compatibility, technical standards, and interconnection, including their effects on pricing and quality of services and on the value of network links in various ownership structures.
Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.
Describes economics of market structure in telecommunications.
TRANSPORTATION
Concessions for Infrastructure: A Guide to Their Design and Award
Finance, Public Sector, and Infrastructure Network, WTP 399, World Bank, Washington, D.C., 1998.
Kerf, Michael et al.
Provides a guide to the complex range of issues and options related to design, award, implementation, monitoring, and modification of concessions. Main rationale for concessions is that they can facilitate the regulation of natural monopolies. They can be used to create competition for the market under conditions in which the service provider has significant market power.
WATER
The Economics of Urban Water Systems
in Thirsting for Efficiency, edited by Mary M. Shirley. Washington, D.C.: The World Bank, 2002, pp.43-63.
Noll, Roger G.
Describes the economics of water in developing countries. Considers issues of supply costs, the political economy of water, externalities in supply, water demand, and usage externalities.
Government Opportunism and the Provision of Water
in Spilled Water: Institutional Commitment in the Provision of Water Services, edited by William Savedoff and Pablo Spiller. Washington, D.C.: Inter-American Development Bank, 1999, Chapter 1.
Savedoff, William, and Pablo Spiller
Explains that “potable water services share three basic characteristics with other utilities that make it difficult to provide them through perfectly competitive markets: large sunk costs, economies of density and/or scale, and massive consumption. The combination of these characteristics leads to significant politicization of the sector’s pricing and operations.” Each item is explained in detail. Later chapters provide case studies to illustrate these concepts.
Key Words
Competition, Monopoly, Costs, Externalities, Network
Definition and Measurement of Market Power, Including Factors Influencing Extent of Market Power, Such as Barriers to Entry
Core References
Competition Policy for Small Market Economies
Cambridge, MA: Harvard University Press, 2003, Chapters 3-4.
Gal, Michal S.
Describes the implications of small economies for competition policy and the regulation of a single dominant firm. Considers the goals of competition policy, how small size limits the effectiveness of structural remedies, the difference between rules that can be applied in large versus small economies, the definition of market dominance, the effects of market dominance in a small economy, and the regulation of market dominance.
Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.
Describes numerous barriers to entry, implications of vertical integration, and possible regulatory remedies.
Economic Analysis of Law
Fifth Edition, New York: Aspen Law & Business, 1998, Chapter 10.
Posner, Richard A.
Explains the economics of competition laws. Considers cartels, horizontal restrictions, mergers, market definition, predation, foreclosure, tie-ins, and barriers to entry.
Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapters 5-6.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.
Explains how to define markets, assess market concentration, consider scale economies, examine entry conditions and market contestability, and identify dominant firms and anticompetitive activities such as raising rivals’ costs and predatory pricing. Describes classic U.S. cases of monopolization.
Sectoral References
ELECTRICITY
Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapters 4-6.
Hunt, Sally
Explains that market power can be exercised by restricting output. In general, “the best solution to market power is to … hav(e) enough competitors in the first place.” Discusses second best solutions. States that markets must be designed with a mechanism for allowing consumers to ration usage in response to high prices. Explains problems of using the HHI in energy. Describes how studies have tried to measure market power by estimating marginal costs and comparing them to prices, but accurately estimating marginal costs is very difficult.
GAS
Prospects for Gas Supply and Demand and their Implications with Special Reference to the UK
in Competition and Regulation in Utility Markets, edited by Colin Robinson, Cheltenham, UK: Edward Elgar, 2003, pp. 91-120.
Kemp, Alexander, G., and Linda Stephen
Provides a case study of analyzing the U.K. gas markets. Considers location of production and consumption, imports, infrastructure, and gas contracts.
TELECOMMUNICATIONS
Analyzing Telecommunications Market Competition: Foundations for Best Practices
University of Florida, Department of Economics, PURC Working Paper, 2009.
Hauge, Janice and Mark Jamison
Explains how to identify market boundaries and measure the intensity of competition, with particular attention to telecommunications in developing countries.
ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.
Explains general principles for competition policy and how to define the market, identify barriers to entry, define market power and market dominance, and identify essential facilities. Explains remedies for anticompetitive conduct, such as abuse of dominance, restricting access to essential facilities, and engaging in cross-subsidization, predatory pricing, and price squeezes. Also describes how to assess mergers and joint ventures.
Market Definition Analysis: Definition of Communications Market in Malaysia
Malaysian Communications and Multimedia Commissioner, Malaysia, 2014.
Examines how the Malaysian Communications and Multimedia Commission conducts its market definition analysis in determining whether there is significant market power. Services covered include fixed services, mobile services, apps, and interconnection. Defines markets along dimensions of product, geography, and stage in value chain. Explains hypothetical monopolist approach and SSNIP (small but significant non-transitory increase in price) test.
Rules for Conducting Market Analysis and Identifying the Significant Market Power
December 12, 2002.
Romania National Regulatory Authority for Communications
Details how the Romanian telecommunications regulator determines significant market power under European Union guidelines. Describes how the relevant market is defined in terms of product and geography, and the criteria used to assess competition, including market share and its stability, vertical integration, number of competitors, users’ countervailing power, price evolution and profit level, and control over a network or infrastructure that is difficult to duplicate.
TRANSPORTATION
Natural monopoly privatisation under different regulatory regimes: A comparison of New Zealand and Australian airports
International Journal of Public Sector Management. Vol: 18 No.3 (2005), 274 – 292.
Domney, Mark D., Heather I.M. Wilson, Er Chen
Compares the profitability and technical efficiency of firms in a monopoly industry, airports, operating with different degrees of market power and under differing regulatory regimes, minimalist in New Zealand and interventionist in Australia. The technical efficiency of privatised airports is assessed, and this independent measure is used in regression analyses to determine whether efficiency, regulation or privatisation is related to airport profitability. For firms with monopolistic characteristics operating under minimalist regulation, profitability is related to market power, not efficiency improvements. For firms operating in a regulated environment, profitability is related to regulation, which constrains market power but does not impede efficiency.
Key Words
Competition, Market power, Anti-competitive, Entry, Barriers to Entry
Case Studies
Regulatory Reforms in India: Effectiveness, Efficiency, and Impacts
The Energy and Resources Institute, New Delhi, India, 2003.
Garg, A., M. Kabra, and R. Kacker
U.S. Experiences with Business Separation in Telecommunications
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A., and James Sichter
Analyzing Telecommunications Market Competition: A Comparison of Cases
University of Florida, Department of Economics, PURC Working Paper, 2009.
Jamison, Mark, Sanford Berg, and Liangliang Jiang
Introducing Competition into the Electricity Supply Industry in Developing Countries: Lessons from Bolivia
August 2000.
Joint UNDP/World Bank Energy Sector Management Assistance Programme
Report on the Effectiveness of Competition in Hong Kong’s Telecommunications Market: An International Comparison
June 2003.
Office of Telecommunications Authority, Hong Kong (OFTA)
Determination Notice: Assessment of Dominance in Mobile Call Termination
OUR, Kingston, Jamaica, September 2, 2004.
Office of Utilities Regulation
Privatization of Electricity Distribution: The Orissa Experience
Tata Energy Research Institute, New Delhi, India, 2003. Purchase.
Ramanathan, K. and S. Hasan