Restraints When Markets Are Contestable We can imagine circumstances in which the natural monopoly firm might, in fact, be forced to price at average cost because of the threat of competition from po tential entrants. The crucial requirement is that entry to, and exit fr the indus- relatively easy. Whether or not the firm has in-place capital that has no alternative whose costs are sunk, usually determines the viability of po tential use, capital monopoly of pro- entry and If established natural ductive capital that cannot be sold for use in other industries, it will be d other firms to compete because they must first cost to up with the es The capital serves as a to entry the greater the replacement cost of such capital, the higher the barrier to entry. For example, once a petroleum pipeline is built between two cities, its scrap value is like- less than a ould face in build- second pipeline. The greater is the difference, the greater is the ability of the established firm fight off an entry attempt lower prices. course, keep in mind that the ability of the firm to charge above the marginal cost level will be influenced by the marginal costs of alternative transportation modes as truck economic research considers industries with low barriers to entry and decreasing average costs, which, because of the threat of potential entry, are said to be in contestable markets 26 We expect markets that are contestable to exhibit pricing closer to the efficient level. One of the most important debates in the literature aris- ing from the contestable market framework concerns the empirical significance of in-place capital as effective barriers to entry?" Most natural monopolies appear to enjoy large advantages in in-place capital, raising the question of whether or not they should be viewed as being in contestable markets. As we have seen, the "naturalness" of a monopoly is determined by decreas- ing average cost over the relevant range of output. In many situations it appears that average cost declines over considerable ranges of output but then flattens out. In other words, initial economies of scale are exhausted as output increases.