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The Political Economy of PipelinesA Century of Comparative Institutional Development$
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Jeff D. Makholm

Print publication date: 2012

Print ISBN-13: 9780226502106

Published to Chicago Scholarship Online: March 2013

DOI: 10.7208/chicago/9780226502120.001.0001

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The Economics of Production Cost: Pipelines as Natural Monopolies

The Economics of Production Cost: Pipelines as Natural Monopolies

(p.29) Chapter Three The Economics of Production Cost: Pipelines as Natural Monopolies
The Political Economy of Pipelines
University of Chicago Press

This chapter evaluates the theory of natural monopoly to show how pipelines are highly idiosyncratic cases of natural monopoly, where the sustainability of their market power is challenged by geology, geography, time, and the regulation of pricing and entry. The natural monopoly has failed in practice to develop a single, investor-owned pipeline in a major regional fuel market. For pipelines, charting the cost curve can be reasonably approximated by exploring the link between output quantities, or the capacity of the line, and the construction cost. The geography and the locationally fixed and irretrievably sunk nature of pipe costs, the politics and the way it determines who builds investor-owned pipelines and where they are built, as well as the regulated pricing itself, were the three attributes of pipelines. In general, the concept of natural monopoly cannot advance the economic analysis of pipeline transport very far.

Keywords:   natural monopoly, pipelines, geology, geography, time, pricing, entry, fuel market

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