Economies of Scale without Intertemporal Links

Abstract

Natural monopoly and oligopoly are due to substantial economies of scale. If the efficient size of firms is large relative to the size of the market, not many suppliers can compete, and thus competition may not work properly. This is the traditional view. Bain’s analysis on barriers to entry due to economies of scale reinforced this traditional view. Some research on the regulation of natural monopoly has recently cast some doubt on it. Economics is in the process of developing a more general theory of incentives. Apart from the narrower regulation literature the theory on incentive compatibility, the economics of information and game theory in general contribute to such a theory. In this context of a theory of incentives the compatibility between substantial economies of scale and competition may have to be reassessed.