Constructivist and Ecological Rationality #4

It is commonly believed that monopoly means one supplier and such a supplier will raise prices and gouge customers.  Vernon Smith used what happened after airline deregulation to show suppliers not acting that way.  “With low entry and exits cost, passenger rates on any route were highly competitive [ ], even if the numbers serving those routes were very small. “Small” includes one. Yes, a route served by only one airline might well charge little above a competitive price; otherwise, the airline would soon find itself facing other airlines operating on the same route. Hence if the route passenger demand were such that it was a “natural monopoly,” with only one firm needed to serve the route at lowest cost, this implied not a monopoly price, but a price that would limit the entry of a second competitor. There is no way that any single airline thinking that it had a monopoly on a particular route could charge more than the opportunity cost of a second entrant. Such a price is a competitive equilibrium price: The market clears with one firm scheduling, say, one flight a day to serve all those willing to pay at least the clearing price, with no firm finding it profitable to schedule a second flight” (p. 86-7).  

He adds that neoclassical economics had relied on the mistaken notion that any competitive equilibrium requires a large number of buyers and sellers actively serving a market, rather than on the opportunity costs of potential suppliers. This is another example of the significance of knowing what is not (an absence of other actual suppliers) in order to understand what is (only one supplier).