This study was begun in the fall of 1978 following the publication in several major economics journals of results that cast the “theory of natural monopoly” in a new light. The traditional viewpoint had generally been that certain industries, primarily the regulated public utilities, might by nature be monopolies but that assuredly no theory was required to account for the natural monopoly status of any given industry.

Recently this viewpoint has been questioned by a number of sources. From a policy-making perspective the last decade has witnessed the transformation of many industries from a regime of pervasive regulation to one of substantial competition. From a theoretical perspective it has been observed that the proper definition of natural monopoly depends on the more elusive property known as subadditivity of costs, rather than on the simple and easily measured condition of economies of scale. Therefore it is no longer obvious, or self-evident, whether or not a given industry satisfies the conditions of natural monopoly.

The purpose of this book is to provide a comprehensive theory that will help those who wish to investigate natural monopoly from either a theoretical or a policy-making perspective. The mathematical level of presentation varies greatly from chapter to chapter, depending on the subject matter. However, at no point is the technical exposition more advanced than is necessary to convey the essential aspects of the theory.