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The theory contestable markets requires that there be no barriers to entry, no sunk costs, and access to the same level of technology. I know common industries that have natural monopolies (like utilities) often break these assumptions. Is there an example of an industry where there is a natural monopoly and it can still be considered a contestable market? Or can these two things not exist together?

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  • $\begingroup$ Isn't this just a minor variation of neoliberalism? It's not just 'common industries that have natural monopolies...often break this assumption'. All of them do as the linked article indicates. $\endgroup$ – Mozibur Ullah Jul 10 at 16:29
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Natural monopolies may exist because the cost structure is such that the market could not sustain two firms. This is usually explained by large sunk costs and relatively small demand - if there were two firms the average cost for at least one would have to be above the equilibrium price.

If there are no sunk costs at all - as set forth in the ideal case of a contestable market - then the long-run average cost function is likely not decreasing, hence this phenomenon cannot occur.

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