Natural Monopolies

Following Sharkey (1987), economists of the 19th century and early 20th century spoke of natural monopoly conditions arising both from superior efficiency of single-firm production and the undesirable consequences of excessive or "destructive" competition. By the middle of the 20th century it was recognized that many network industries such as railroads or telecommunications possess to some degree the characteristics of a natural monopoly. It is then also "natural" to assert that these monopolies (or oligopolies) have to some degree market power, that is they are able to raise prices above the competitive level in that market for a non-transitory period. In doing so private decision-making takes inadequate account of the "public interest" which is the justification for governments all over the world to establish regulatory agencies. In many cases the governments even believe to be the only authority that can provide networks as well as network services efficiently. Some familiar examples of publicly owned networks are road systems, airlines, telecommunications and postal networks. Since 1980 many of such networks have been privatized where the most frequently cited objectives of privatization are (1) the improvement of the economic performance and (2) the generation of public budget revenues through sale receipts; see Hanke (1987) for more details. Again regulatory authorities were needed to prevent the incumbent monopolist from abusing its market power. The most important objective is now to assure that incumbents cannot illegally prevent potential rivals from market entrance so that a situation arises as if competition prevails.

(1) On the pros and cons of a commercial provision of roads in a competitive framework see Roth (1996).
(2) Even the constitution of the United States of America includes in the first article that the Congress shall have power to establish post offices and post roads.
(3) For further details on regulating specific industries such as electricity supply, telecommunications or railway transport in Germany see Eisenkopf (2003).