At the end of the 1970's, a wide economic process of privatisation and deregulation has spread over Europe and most of the world. However, in most economies, certain industries have been kept nationalised longer than others have. A large part of those industries had in common to deal with utilities such as electricity, gas and more generally to be in position of natural monopoly. Baumol defines natural monopoly as "an industry whose cost function is such that no combination of several firms can produce an industry output sector as cheaply as it can be provided by a single supplier-. Basically, it means that for a specific industry, a single supplier will be more efficient than several will. Natural or not, the problem remains the same. Large private monopolies usually end up using their market power to produce below the socially efficient level and therefore are not allocative efficient. In addition to that, price and output can be expected to diverge to a greater extent from their competitive levels the fewer the firms that produce the product for the market. These problems, combined with the privatisation trend, have pushed the economists to search an alternative solution to the simple privatisation.
The "response- to the natural monopoly problem came from Chicago, as early as 1968, and was developed by Demsetz, Stigler and Posner (1972 for the latter). It consists in franchising. Franchising involves bidding for the exclusive right to supply goods and services for a specified period. Obviously, the response has not satisfied everybody, otherwise we could suppose that privatising natural monopolies would not be a problem anymore.
So, in a first part of this paper, we shall try to understand how franchising contracts could be an appropriate measure to solve the natural monopoly problem and then secondly, we should study the difficulties inherent to franchising.
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The main problem of natural monopoly is that it faces no opposition in the market.
