Demand-side determinants of natural monopoly

Conclusion

The demand price of certain goods or services may vary with the scale or number of producing firms, for any of several reasons. The scale of output may directly affect the character or quality of the product; output may be measured in improperly defined units, through ignorance or necessity; firm scale may affect the magnitude of networking or other costs borne by the consumer; or the balance of market power may be shifted between monoposony and monopoly.

A welfare-maximizing concept of natural monopoly should take these effects into account, and therefore must incorporate measures of demand in addition to an analysis of cost functions. This paper has presented the condition ofsuperadditive net surplus as such a concept. In the special case of a single-commodity firm with constant returns, the concept simplifies to that of superadditive inverse demand.