Natural Monopolies 2017

Definition There are several interpretations of what a natural monopoly is It occurs when one large business can supply the entire market at a lower price than two or more smaller ones A natural monopoly is a situation in which there cannot be more than one efficient provider of a good. In this situation, competition might actually increase costs and prices It is an industry where the minimum efficient scale is a large share of total market demand such there is room for only one firm to fully exploit all of the available internal economies of scale An industry where the long run average cost curve falls continuously as output expands

Natural monopolies tend to be associated with industries where there is a high ratio of fixed to variable costs. In this case, the average total cost will continue to decline as the scale of production increase, because fixed (or overhead) costs are being spread over higher and higher levels of output

Railways Electricity supply

Application of the theory The existence of natural monopolies may strengthen the argument that monopolies may have some advantages over a competitive market. If a firm benefits from economies of scale it may be able to charge consumers lower prices

The telecommunications industry has in the past been considered to be a natural monopoly. Like railways and water provision, the existence of several companies supplying the same area would result in an inefficient multiplication of cables, transformers, pipelines etc. However the perception of what constitutes a natural monopoly is now changing - in part because of the impact of new technology in reducing traditional barriers to entry within markets.