Abstract
We consider a shared ownership arrangement among consumers/owners as a means to organize production with an underlying decreasing average cost function typical of natural monopolies. The resulting output allocation yields a lower deadweight loss than the monopoly allocation, and is, in some cases, efficient.
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Notes
For the definition of subadditive costs, see, e.g., Braeutigam (1989).
See, e.g., Khan (2016).
This cost efficiency argument must account for the deadweight loss from monopoly, which acts as a countervailing force.
Consider the case of Pacific Gas and Electric Company, the investor-owned utility headquartered in San Francisco, and its handling of recent fire threats in California by employing sweeping power outages.
Consider planned obsolescence in market economies, a phenomenon that is hard to sustain under shared ownership by consumers/users.
The behavioral assumption matters even in the case when consumer decisions have a limited effect on ownership shares (as would be the case here if n were ‘large,’ i.e., if consumers were ‘small’ relative to the size of the market), in the sense that, in our framework, equilibrium outcomes differ from those that would obtain in a ‘Walrasian-like’ setting where consumers ignore the ownership effect.
Recall that the average cost curve is decreasing.
If the assumption that each consumer i’s surplus for the first unit consumed exceeds \(\textit{AC}(\sum _{j\ne i}{\hat{x}}_j)\) is not fulfilled, then the consumers will not demand good x. More precisely, only consumers for which the said assumption holds will consume good x. If no one values the good enough to pay its average cost, production will not take place, solving Coase’s problem.
As an example, consider the production function \(f(l,k)=lk^2\), which exhibits increasing returns to scale (resp. constant returns to scale) with respect to labor and capital (resp. labor).
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Carbonell-Nicolau, O. An alternative to natural monopoly. J Regul Econ 58, 184–192 (2020). https://doi.org/10.1007/s11149-020-09416-x
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DOI: https://doi.org/10.1007/s11149-020-09416-x