The concept of natural monopoly is one of the most familiar in economics. Many supposed natural monopolies are the object of widespread state, local, and federal regulation. It was in addressing issues of public utility regulation that Demsetz laid the foundation for an alternative scenario for decreasing cost markets. Demsetz's article promoted a debate over whether a formal auction system might provide a practical approach to monopoly control. This literature is rich in examining the practical difficulties of implementing such an institution. The important characteristic of the contestable markets hypothesis, as we interpret it, is that at least two firms bid, in the sense of Demsetz, directly for buyer purchases.
Coursey, Don, R. Mark Isaac, and Vernon L. Smith. “Natural Monopoly and the Contestable Markets Hypothesis: Some Preliminary Results from Laboratory Experiments.” Journal of Law and Economics, 27 (1984): 91-113.
University of Chicago