When Firms Contest in Markets : An Experiment

Regulating a natural monopoly market has always remained a source of concern. The problem arises because of the decreasing average cost structure in the market. Ideally, only one firm serving the whole market demand is the efficient solution to avoid any cost duplication. However, when there is a single unregulated firm serving a market it brings up the standard monopoly price-gouging problem. Many utility services share the characteristics of a natural monopoly. As a result, almost all countries in their deregulation phases are concerned with the efficient running of such markets. Restraining monopoly behavior effectively in a natural monopoly market remains a much-debated issue. The idea of creating a “contestable”1 environment has influenced USA, UK and many other countries during their deregulation phase. In a perfectly contestable market2 the threat of hit-and-run entry by new entrants in the monopoly market can provide the right disciplining stick for the monopolist incumbent to charge a price equal to the average cost of production (the Ramsey optimal price). This outcome is described as a contestable (market) outcome