A. Structural Deficits of Network Industries

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The structural deficits typical for network industries are present in the fact that network industries cannot, without public intervention, be regarded as competitive. The duplication of networks is rendered economically impossible by the fact that networks are natural monopolies. This implies that a multiplication of networks is not an efficient or suitable solution in order to address distorsion of competition. Thus, a free grid access based on a non-discriminatory model as well as the unbundling requirements seen in the third package are crucial elements in order to achieve a well-functioning internal energy or telecommunication market in Europe. According to Posner, a natural monopoly “does not refer to the actual number of sellers in a market but to the relationship between demand and the technology of supply. If the entire demand within a relevant markt can be satisfied at lowest cost by one firm rather than by two or more, the maket is a natural monopoly, whatever the actual number of firms in it.”

B. Limits of Competition Law 

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According to Posner, the ex post control by competition law is not sufficient because in a natural monopoly, competition is either short lived or produces insufficient results.
This is further explained by the fact that regulatory policies are ex ante provisions in order to create a desirable amount of competition. Regulation is indeed a necessary step to improve the allocation of resources and achieve a competitive structure of a natural monopoly. This is the only option in order to create incentive effects and grant access to third parties. “Competiton is thus not a viable regulatory mechanism under conditions of natural monopoly… direct controls are necessary to ensure satisfactory performance”.

C. Other Aspects

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Innovation is another aspect discussed by Posner. Regulation is also a tool in order to fuel innovation. “An innovation that reduces the cost of a product sold under competitive conditions enables the innovator to reduce his price, and if by doing so he can drive out his competitors and obtain a monopoly profit a great deal of the extra value, above cost, that consumers attach to the product. The monopolist, in contrast, is presumably already capturing much of the consumers´ surplus available in his market. A reduction in his costs would enable him only to capture some more”. Accordingly, the incentive of a competitive market concerning innovation is much larger than in a monopoly.

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