Perfectly Contestable Monopoly and Adverse Selection

In a contestable market the possibility of "hit-and-run" entry prevents the price from rising above average cost. A contestable natural monopoly earns zero profits despite economies of scale. We show that informational imperfections can also result in a single firm serving the entire market with zero profits. This is possible even under constant returns to scale, and when barriers to exit preclude "hit-and-run" attacks and force potential entrants to consider the post-entry response of the incumbent firm. Furthermore, the equilibrium involves cross-subsidization, which is not possible in conventional contestable markets