Chapter 24 Non-Convexities, Economies of Scale, Natural Monopoly and Monopolistic Competition

The classical discussion of the consequences of non-convexities took a new form as principles of game theory became joined with the structural features of large economies of scale. New models suggest that the threat of competition, as opposed to the existence of an actual competitor, serve to control monopolistic practices. The issues found in the literature explore and debate both the basic behavioral principles that might be at work as well as the application of those principles in particular situations. Sellers made private decisions about which of the two markets to enter. If the market with scale economies was chosen, then the seller chose three variables: the scale of plant that would be operated, the price to be posted and the maximum quantity to be offered. All decisions were made public simultaneously. After decisions were made public, sellers had the option of reducing their maximum quantity sold to zero.