Monopoly is a market structure in which a firm dominates the market, producing a good with no close substitutes. The characteristics of monopoly are barriers to entry in the market, the product is unique and the firm coincides with the industry. The article presents the natural monopoly argument. The natural monopoly argument occurs when the maximum efficiency and distribution of a good is realized through a single supplier due to the economies of scale of a particular industry. The following diagram illustrates the issue:
As evident in the article, DEI operates as a monopoly setting the price at P1 and providing Q1, where the Marginal Cost (MC) is equal to the Marginal Revenue (MR) [4] . The monopoly firm experiences supernormal profits (SNÎ 's) equal to the area P1BDAC. When other companies join the market, the demand for electricity is more elastic. Hence, the Demand (D) curve shifts leftwards at D2. Now, the price has been decreased at P2 and each firm provides at Q2. As demonstrated, AC's are not covered and thus firms experience losses equal to the area AC2YZP2. The Natural Monopoly argument illustrates the case where firms do not enter the market due to the lack of incentives. Consequently, one firm dominates the market naturally. Natural monopolies might be based on economies of scale such as the case of the electricity generating and distributing company in Greece. The article raises the issue of whether the government should regulate market behaviour. The EU proposes the entrance of other firms in the market of electricity. The theory argued that costless entry and exit from the market will encourage the incumbent firms to lower average cost price in order to discourage "hit and run" tactics by potential new entrants. In short, the three conditions of contestability are these of the absence of sunk costs, perfect information and technological availability and freedom to advertise and legally enter the market [5] . The following diagram illustrates the issue:
Assume that a firm enjoys a monopoly position in a perfectly contestable market. The firm sets the price at P1 and produces at Q1. The firm enjoys supernormal profit equal to the area P1BDC. As a result, new entrants will be attracted in the market. Since there are no sunk costs, the new firms will enter the market and take away the market share of the incumbent firm, unless the price is set at P2 where all the firms enjoy normal profit. It is possible that firms might switch their profit maximizing policy to that of a sales maximizing policy. Generally speaking, the degree of contestability is measured by the extent of reduction in price.
However, evaluating the theory of contestable markets makes us see that there are certain flaws in terms of practice and the degree of efficiency. Firstly, no market can be perfectly contestable in terms of the absence of sunk costs. Hence, we depend on the degree of contestability and the theory itself acts as a reference point. Secondly, we cannot see whether the absence of sunk costs truly affects the economic activity of the incumbent monopolists. This is because we don't have the available amount of information about the cost structure of the incumbent firm. Plus, the whole theory is based on the threat caused by the potential new entrant. The absence of new competition in an industry does not necessarily show lack of contestability. Thirdly, there is a certain degree of controversy on whether the threat of hit and run tactics can actually harm the firms to such an extent that they might give away their supernormal profits. The incumbent monopolists can make price wars in which they carry on making supernormal profits until the hit and run tactic occurs. Then, if necessary, the monopolist firm can reduce prices below costs for a while. The monopolist firm has enjoyed supernormal profits with which it can cover the possible cost of such an act because of enjoying economies of scale. However, the new firms entering the market cannot take the reduction of the price since being new they had no chance to earn any profits. Hence, the new firms go bankrupt and the monopolist firm continues on being the dominating firm.
