cost curve (AC), the average cost of production for each of the half-size companies producing 2, as point B

shows, would be 9.75, while the average cost of production for a larger firm producing 4 would only be 7.75.

Thus, the economy would become less productively efficient, since the good is produced at a higher average

cost. In a situation with a downward-sloping average cost curve, two smaller firms will always have higher

average costs of production than one larger firm for any quantity of total output. In addition, the antitrust

authorities must worry that splitting the natural monopoly into pieces may be only the start of their problems.

If one of the two firms grows larger than the other, it will have lower average costs and may be able to drive its

competitor out of the market. Alternatively, two firms in a market may discover subtle ways of coordinating

their behavior and keeping prices high. Either way, the result will not be the greater competition that was
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