The term “destructive competition” has been widely used, and much abused, in the nontechnical and popular literature on natural monopoly and regulated industries. This chapter will investigate the possible merits of the proposition that competition is at times destructive by setting out a formal economic model based on the theory of cooperative games.

In many respects this chapter is a continuation of the work that was begun in Chapter 5. For example, the game theoretic approach to market stability is the same as that used in Section 5.3, although now it will be developed on a more formal and rigorous level. In addition, a nonsustainable natural monopoly may be correctly viewed as a particular example of a market in which competition is destructive. In Chapter 5 it was argued that although the theory of sustainability of natural monopoly is highly intuitive and useful, it is by no means a total theory of entry or competitive behavior in a natural monopoly industry. The results of this chapter may be seen as an attempt, from the point of view of cooperative game theory, to construct a model of competitive behavior in a market that is a natural monopoly or natural oligopoly. As will be seen later, it is convenient to build a cooperative theory of market stability on the demand side of the model.