Abstract
We study the conditions under which production processes exhibit a decreasing average cost function in the absence of perfectly competitive input markets and discuss some implications for regulatory policy.
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Notes
The case of Amazon is detailed in Khan (2016). See also the empirical analysis in Azar et al. (2022), which shows that “[g]iven high concentration, mergers of employers have the potential to significantly increase labor market power.” Naidu et al. (2018 pp. 546–547) survey empirical literature suggesting that “industry consolidation has given employers greater bargaining power in labor markets.”
The essence of the argument that follows also applies to the case of ‘land.’
The Lerner index of a firm’s market power (Lerner, 1934) can be expressed solely in terms of the firm-level price elasticity of demand.
A downward sloping \({\textit{MR}}(\cdot )\) function is sufficient but not necessary for the elasticity of the cost function with respect to k to be greater than one.
Note that we are adopting a “long-run” perspective, since no input is fixed over the underlying time horizon.
See, e.g., Joskow (2007) for a survey.
See, e.g., Azar et al. (2019).
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Carbonell-Nicolau, O. Natural monopoly revisited. J Regul Econ (2024). https://doi.org/10.1007/s11149-024-09479-0
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DOI: https://doi.org/10.1007/s11149-024-09479-0