Abstract
In a contestable market the possibility of hit-and-run entry prevents the price from rising above average cost. A contestable natural monopoly earns zero profits despite economies of scale. We show that informational imperfections can also result in a single firm serving the entire market with zero profits. This is possible even under constant returns to scale, and when barriers to exit preclude hit-and-run attacks and force potential entrants to consider the post-entry response of the incumbent firm. Furthermore, the equilibrium involves cross-subsidization, which is not possible in conventional contestable markets.
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