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Manuela Mosca
342
a rst step in the elaboration of the decreasing average cost function.
Chadwick has to be remembered mainly for his principle of competition for
the eld, while there is no evidence of any other original contribution to the
notion of natural monopoly by him. We have seen that Walras was very much
inuenced by J. S. Mill and Dupuit; for himwe can say the same as we said with
respect to Mill that is, he is present in ve columns: yet, compared with that
of Mill, Walras analysis was much more focused on the issue, as his essay was
specically devoted to the railways; however, he did not use mathematics in
dealing with it. Another important French economist who must be mentioned
here is Cheysson, for having plotted a decreasing average cost curve.
A signicant place is occupied by American economists. Despite his
critical tone, ODriscoll (1982) rightly stresses the importance of the legacy
of Ely; and Hazlett (1985) does the same, critically as well, with H. C.
Adams. From our analysis it emerges that Elys role was mainly that of
consolidating the use of the expression natural monopoly, that Hadley is
important for the focus on the adjustment process that leads to monopoly,
and that Adams is noteworthy for having distinguished three classes of
returns to scale.
74
Italian marginalists are also very important in this
context, although they are completely neglected by the secondary literature
on natural monopoly: the link between network effects and monopoly we
certainly owe to De Viti de Marco (1890), while the consideration of market
demand, which is essential to qualify a natural monopoly, and the
description of the diagram, come from Barone (1908).
However, there is no doubt that the pivotal gure for this reconstruction
is Edgeworth (1911 to 1913). In his long article the various elements that
make up the concept of natural monopoly are all present except the
expression. In fact his analysis is specically devoted to constructing an
abstract theory of railway economics, where railways are considered as the
leading type of a wider class, . . . public works, characterized by monopoly of
such a kind as to justify the intervention of the State (Edgeworth 1911a: 346).
10. Conclusions
The research carried out so far highlights some interesting aspects.
1. We have seen that Cournot, Mill, Walras, the American and Italian
marginalists, and Edgeworth realized that some rms become monopolies
74 Sharkey writes that Adams is one of the rst to suggest direct regulation of
natural monopoly (1982: 15), but actually we have seen that Dupuit and Walras
did this before him.
Origins of the concept of natural monopoly
343
just because in those industries competition cannot work. The idea that
monopoly implies the absence of competition is linked to a specic notion
of competition, that of perfect competition. The history of the theory of
competition has been widely studied in the literature.
75
If we compare the
historical reconstructions of the notion of perfect competition with our
history of the concept of natural monopoly, we can see that there is a
remarkable overlapping between the economists who elaborated that
notion, and those who played a role in identifying natural monopolies.
This suggests that the notion of natural monopoly emerged together with
that of perfect competition. The link between the two is also conrmed if
we consider the criticisms of the concept of natural monopoly, and the
related different notions of competition. The Baumol group, for example,
replaced the notion of perfect competition with that of contestability: as we
have seen, their fundamental idea is that the monopolist would be
compelled by the threat of new entry to behave according to the principles
of the perfect competitive model. We can also mention the Chicago
school: according to their idea of competition, market share does not
imply market power and monopolies are dictated by efciency. We nally
recall the Austrian view of competition as a dynamic process and of market
power as an expression of competitive rivalry. The most recent develop-
ments of microeconomics employ still other notions of competition,
76
which imply different ideas on natural monopoly. For example, according
to Shepherd, mainstream is not static efciency only, perfect competition
only, and total natural monopoly only . . . Instead there is an entirely
satisfactory competitive standard: effective competition, rather than the
pure theorists textbook idea of perfect competition (1995: 3056;
emphasis added). Also Vickers states that the concept of competition as
equilibrium resource allocator is not the only model of a modern micro-
economist (1995: 18); he uses the advances in economics of imperfect
information, imperfect competition, and dynamic processes (Vickers
1995: 7) to discuss incentives, selection and innovation . . . three of the
fronts on which advances are being made (1995: 18). We nally cite Blaug,
who encourage scholars to abandon the concept of perfect competition
(1997: 79), as well as its near-neighbour, the theory of perfectly contes-
table markets (Blaug 1997: 80), to promote the study of every chapter in
every textbook on imperfect or monopolistic competition, on oligopoly,
duopoly and monopoly, in short, . . . industrial organization (1997: 80).
75 In addition to the references cited in Blaug (1997), see DiLorenzo and High
(1988), Groenewegen (1999), Machovec (1995), and Morgan (1993).
76 For a history of the concept of competition up until recent times see Backhouse
(1990).
Manuela Mosca
344
With these complex notions of competition in the background, the new
industrial organization shows that even when entry is in principle free,
reasons to worry about monopolies still exist (Motta 2004: 71).
2. In Section 5 we have seen that Smith, Senior, Pantaleoni, Marshall, and
Pareto did not believe in the incompatibility of scale economies with
competition. Pantaleoni, for example, in his later work on combinations
and associations, did not consider them any actual danger for the
competitive process, because he believed that the threat of entry by new
rms is always at work (Pantaleoni 1903 [2001]: 1645).
77
Moreover, if
we examine all those ideas that, in order to follow our particular path
closely, we have here decided to exclude from our account, it will be
seen that we could reconstruct another, quite different history of the
concept of natural monopoly, by no means less rich. For example, we
might reconstruct the history of the idea that natural monopoly is always
exposed to competition, or that it is itself an expression of competition.
It would be sufcient to follow the historical development of the concept
of potential competition, or that of competition dened only in terms of
free entry, or that focused on the competitiveness of large rms. This is
what Sharkey does, when he points out that before the 1970s many
economists had already noted that the test for economies of scale is an
incomplete test of natural monopoly (Sharkey 1982: 21); and also
Hazlett, highlighting those economists who believed in the universality
of the competitive assumption (Hazlett 1985: 5). DiLorenzo and High
do the same, when noticing that economists at the turn of the century
thought that the advantages of competing in large-scale units increased
output and beneted the consumer (DiLorenzo and High 1988: 426).
These two positions (whether natural monopoly is protected from
competition or not) have always confronted each other, all along the
history of economic thought, and they are still sources of lively debate.
3. ODriscoll writes that: surely few would argue that monopoly is a
concept of any interest independent of policy implications (1982: 209);
in this case we belong to the few, because our analysis shows that the
problem of compatibility of scale economies with competition, which is
crucial in identifying natural monopoly, was mainly a theoretical matter.
However, it is well worth reecting on these implications, too. They are
important also because the critics of the concept of natural monopoly
claim that it was intended precisely for its policy implication,
78
and that
77 Pantaleonis view of market power is examined in Mosca (2007).
78 The fundamental importance of natural monopoly is a legalistic entity that
facilitates the efforts of political coalitions to restrict output in the manner
predicted in the capture view of regulation (Hazlett 1985: 2).
Origins of the concept of natural monopoly
345
it was even developed by economists only as an ex post rationale for
government intervention (DiLorenzo 1996: 43). And there is no lack of
allegations from the symmetrically opposite perspective: the Baumol
group, for example, is in fact accused of proposing the recurrent
arguments favoring a cutback to minimal antitrust policies (Shepherd
1995: 299). In the light of the previous analysis we can say that, as soon as
natural monopoly was considered a market failure, economists,
including those who supported the free market, put forward claims for
antimonopoly policies. This position, again, was adopted by those
economists who (more or less explicitly) accepted perfect competition
as an ideal benchmark.
79
In effect, if monopolistic power depends on
market structure, and if the market is concentrated due to entry barriers,
then competition policies are needed. On the other hand, in the free
market-oriented literature that holds different notions of competition
no interventions are required, such as public ownership or regulation
for utilities, and antitrust policies for networks. We have seen that
nowadays the theory of industrial organization, studying the strategic
contexts in which the potential entrants and the incumbents operate,
concludes that there are a number of reasons why market forces alone
are unlikely to reduce market power (Motta 2004: 71).
4. We are facing a typical case of economic thought shaped by reality. In
fact the spread of the expression natural monopoly in its current
meaning, and the consolidation of the related theory, came about
mainly with the spread of the situation that could be described as natural
monopolies. For instance, when Ely says that various undertakings . . .
are monopolies by virtue of their own inherent properties, he also
species that these undertakings are nearly all of them comparatively
new (1894: 294); also the article by Hadley (1886) clearly shows that,
through numerous examples drawn from the economy of the time, the
problem appeared particularly in those years. The public utilities and
networks determined the theory; it is true that the tools provided by
Cournot already existed, but many economists did not use them for their
explanations.
5. A by-product of having kept the history of the various elements that
contribute to the concept of natural monopoly separate has brought out
the undoubted importance of the work of economists from many
countries, and also of the Italian marginalists. In the secondary literature
79 An interesting point by DiLorenzo and High is that: Perhaps the clearest link
between economists changing views of competition and their support of
antitrust in the post 1920s era is found in the structure-conduct-performance
paradigm of industrial organization theory (1988: 431).
Manuela Mosca
346
one often nds the statement that the debate over costs and competition
is a phenomenon of the 1920s; we have seen here that the beginning of
the debate can certainly be anticipated to the works of the Italian
marginalists, and especially to Barone, who deserves priority over the
others. Their actual inuence on that debate remains to be studied
although, in view of their international fame, it was certainly
considerable.
80
To conclude, we are aware that the concept of natural monopoly still
contains many features it would be well worth while examining more
closely. We hope that with this article we have helped prepare the ground
for further research.
Acknowledgements
Helpful comments from Giampaolo Arachi, Michael Bradley, Gilbert
Faccarello, Francesco Ferrante, Vitantonio Gioia, Marco E. L. Guidi, Russel
Pittman, Marcella Scrimitore, David Teira, and two anonymous referees are
gratefully acknowledged. The usual caveat applies.
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Abstract
The present article contributes to the history of the concept of natural
monopoly, focusing on the reconstruction of its origins. The paper
considers various facets of natural monopoly: the expression itself; the
singling out of the concrete situations to which it is applied; the inquiry into
economies of scale; the consideration of their incompatibility with perfect
competition; the drawing of the diagram; and the need for government
intervention. In this paper each of the above features is separately
examined from a historical perspective. Priorities and inuences are then
traced, and in particular it is found that the pivotal gure in this historical
reconstruction is that of Edgeworth. The relation of the concept of natural
Manuela Mosca
352
monopoly with that of competition is also highlighted, as well as its policy
implications.
Keywords
Natural monopoly, economies of scale, competition, cost curves, network
industries, contestable markets, barriers to entry, market power
Origins of the concept of natural monopoly
353