Vol. 20 No. 41 (2024)

Artículos

Natural monopoly: effects of product demand on price and quantity produced.

Published 2024-12-02

  • Alejandro Rodríguez Arana

Alejandro Rodríguez Arana
Universidad Iberoamericana, Ciudad de México

Abstract

This work theoretically analyzes the possibility that in the presence of decreasing average and/or marginal costs, greater demand for the product in question reduces the sales price of that product. The answer is that this is possible, but it is not a general result. For the price to fall when demand increases, it is a necessary, but not sufficient condition for the marginal cost to be decreasing. In the presence of a logarithmic demand and a logarithmic variable total cost function, where there are increasing returns in production, the analyzed effect occurs. When the demand is linear and the cost structure is as already described, the analyzed effect does not occur. In real life, there is a continuous reduction in prices of products that may have decreasing marginal costs, which could be due in part to the effect analyzed here.

Keywords

Natural monopoly, decreasing marginal cost, decreasing average cost, demand, price

PDF (Spanish)

References

  1. Akerlof, G and J. Yellen (1985). A near rational model of the business cycle, with wage and price inertia. The Quarterly Journal of Economics, 100, pp. 823-838.
  2. Baumol, W (1977). On the proper cost tests for natural monopoly in a multiproduct industry. American Economic Review, 67, pp. 809-822.
  3. Carlton, D y J. Perloff (2004). Modern industrial organization. Addison Wesley, cuarta edición.
  4. Coase, R. (1946). The marginal cost controversy. Economica, 13, pp. 169-182.
  5. Depoorter (1999). Regulation of natural monopoly. Encyclopedia of Law and Economics, Cheltenham, Edward Elgar, pp. 845-865.
  6. Dixit, A and J. Stiglitz (1977). Monopolistic competition and optimum product diversity. American Economic Review, 67, pp. 297-308.
  7. Frischman, B y C. Hogendorn (2015). Retrospective: The marginal cost controversy. Journal of Economic Perspectives, 29, pp. 193-206.
  8. Holtelling, H (1938). The general welfare in relation to problems of taxation and of railway and utility rates. Re impreso en: The Collected Economic Articles of Harold Hotelling. A. Darnell (editor) 1990. Springer-Verlag.
  9. Joskow, P (2007). Regulation of natural monopoly. Handbook of Law and Economics, 2, pp. 1227-1348.
  10. Khezr, P y R. Nepal (2021). On the viability of energy capacity markets under decreasing marginal costs. Energy Economics, 96, pp. 105-157.
  11. Nicholson, W y C. Snyder (2015). Teoría Microeconómica: Principios Básicos y Ampliaciones. Cengage Learning. 11ª edición. Ciudad de México.
  12. Nguyen, B y A. Wait (2018). Lo Esencial de la Microeconomía. Editorial Trillas, primera edición. Ciudad de México.
  13. Pindyck, R y D. Rubinfield (2018). Microeconomía. Pearson Education. Madrid.
  14. Posner, R.A (1969). Natural monopoly and regulation. Stanford Law Review, 21, pp. 548-643.
  15. Sharkey, W (1982). The theory of natural monopoly. Cambridge University Press. Cambridge, Inglaterra.
  16. Varian, H (1992). Microeconomic Analysis. W. W. Norton. Londres, Nueva York.
  17. Varian, H (2020). Intermediate Microeconomics. W.W. Norton. Londres, Nueva York. Novena edición.

Most read articles by the same author(s)