A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. This frequently occurs in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market; examples include public utilities such as water services and electricity. Natural monopolies were discussed as a potential source of market failure by John Stuart Mill, who advocated government regulation to make them serve the public good.
What is a ‘Natural Monopoly’
A natural monopoly is a type of monopoly that exists as a result of the high fixed costs or startup costs of operating a business in a specific industry. Additionally, natural monopolies can arise in industries that require unique raw materials, technology or other similar factors to operate. Since it is economically sensible to have some monopolies like these, governments allow them to exist but provide regulation, ensuring consumers get a fair deal.
Explaining ‘Natural Monopoly’
A natural monopoly, like the name implies, is a monopoly that does not arise due to collusion, consolidation or hostile takeovers. Instead, natural monopolies occur when a company takes advantage of an industry’s high barriers to entry to create a “moat” or protective wall around its operations.
The Positives and Negatives of Natural Monopolies
Natural monopolies occur due to an industry’s high cost structure; in most cases, a single firm is able to supply a product or service at a lower cost than any potential competitor, and at a volume that can service an entire market. This makes pure natural monopolies very rare, but they do exist, and most often as a single player in an industry. But just because a company operates as a natural monopoly does not explicitly mean it is the only company in the industry.
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