2006 The Role of Competition in Natural Monopoly Costs, Public Ownership, and Regulation英文版本.pdf

Review of Industrial Organization (2006) 29:127–147 © Springer 2006 DOI 10.1007/s11151-006-9112-x The Role of Competition in Natural Monopoly: Costs, Public Ownership, and Regulation JOHN E. KWOKA∗ Department of Economics, Northeastern University, 301 Lake Hall, Boston, MA 02115, USA Abstract. Conventional policy for industries with very high economies of scale is to per- mit 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 econo- mies. 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. Key words: Benchmark competition, electric utilities, public ownership, regulation. I. Introduction Although the relationship between competition and price receives more attention, the effect of competition on costs may be at least as impor- tant. By some measures the efficiencies gained from the latter exceed al- locative improvements due to price competition (Scherer and Ross, 1990, p. 672), and in any event, cost reductions are one reason for price declines. All this makes cost competition seem universally advantageous, but where production technology is characterized by significant economies of scale, classical competition involving multiple firms would seem to be an unprom- ising approach: Competition may force firms to minimize cost for a given output and thus operate