Economies of Scale, Natural Monopoly and Imperfect Competition in an Experimental Market
This paper reports on the behavior of markets in which all agents have identical costs with economies of scale over the entire range of demand. Each firm, by choosing a larger scale of plant and a larger volume, can experience lower average cost. Thus, the markets are characterized by the fundamental technological property that has motivated decades of theorizing about natural monopoly and imperfect competition. The primary question posed by the research is whether or not a natural monopoly emerges and sets prices at monopoly levels, or whether the data are more closely approximated by some alternative model of imperfect competition, such as monopolistic competition, Cournot oligopoly, or contestable market theory.
© 1994 Southern Economic Association. This paper began with a project in an experimental economics class at Caltech in which G. Elbaz and A. Sugiyama were undergraduate students. In addition to the authors, Peter Ying contributed to the project during the initial stages of research. The comments of William Novshek are also appreciated. The financial support of the National Science Foundation and the Caltech Laboratory for Experimental Economics and Political Science is gratefully acknowledged.
Published - economies_of_scale_natural_monopoly.pdf