A TRANSACTIONAL COST APPROACH TO THE NATURAL MONOPOLY REGULATION

The transactional cost framework seeks to identify the characteristics of transactions that lead classical “spot markets” to fail, in the sense that the spot market is a more costly mode of exchange than alternative institutional arrangements (e.g. some type of long term contract or vertical integration). This paper provides a theory of natural monopoly regulation that parallels the theory of the firm and the theory of contractual institutions.