Non-Convexities, Economies of Scale, Natural Monopoly and Monopolistic Competition

Abstract

The behavior of markets characterized by non-convexities has been the subject of debate for almost a century. Marshall, for example, thought that the existence of large economies of scale in an industry would be a sufficient condition to guarantee that with any initial competition, the industry would ultimately result in monopoly. The great discussions between Joan Robinson and Edward Chamberlain were focused the principles that lie beneath the process of adaptation when non-convexities are present. A major question was whether monopoly or some constellation of oligopolies would evolve when competing firms had falling average costs throughout the range of demand. Much of industrial organization theory is built upon the principles of Cournot behavior. The theory predicts that Cournot prices will emerge from oligpolized markets and that such behavior will approach competitive behavior as the size of the economy grows large.

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