Does the theory of contestable markets apply to industries where there is a natural monopoly? The theory contestable markets requires that there be no barriers to entry, no sunk costs, and access to the same level of technology. I know common industries that have natural monopolies (like utilities) often break these assumptions. Is there an example of an industry where there is a natural monopoly and it can still be considered a contestable market? Or can these two things not exist together?
Natural monopolies may exist because the cost structure is such that the market could not sustain two firms. This is usually explained by large sunk costs and relatively small demand - if there were two firms the average cost for at least one would have to be above the equilibrium price.
If there are no sunk costs at all - as set forth in the ideal case of a contestable market - then the long-run average cost function is likely not decreasing, hence this phenomenon cannot occur.