Natural Monopoly
A Natural Monopoly is a monopoly market structure that achieves natural monopoly lowest cost when natural monopoly production is concentrated in a single natural monopoly firm due to natural monopoly economies of scale.
- AKA: Efficient Monopoly, Infrastructure Monopoly, Cost-Subadditive Monopoly.
- Context:
- It can typically exhibit Natural Monopoly Decreasing Average Costs across the natural monopoly relevant output range.
- It can typically require Natural Monopoly High Fixed Costs for natural monopoly infrastructure investment.
- It can typically achieve Natural Monopoly Cost Efficiency through natural monopoly scale economy.
- It can typically create Natural Monopoly Entry Barriers through natural monopoly cost advantage.
- It can typically face Natural Monopoly Regulatory Oversight through natural monopoly government intervention.
- It can typically provide Natural Monopoly Essential Services through natural monopoly infrastructure network.
- It can typically demonstrate Natural Monopoly Subadditivity where natural monopoly single firm cost is less than natural monopoly multiple firm cost.
- It can typically require Natural Monopoly Capital Investment for natural monopoly network construction.
- It can typically generate Natural Monopoly Network Effects through natural monopoly interconnection value.
- It can typically necessitate Natural Monopoly Price Regulation to prevent natural monopoly monopolistic pricing.
- ...
- It can often exhibit Natural Monopoly Excess Capacity at natural monopoly competitive output levels.
- It can often require Natural Monopoly Public Ownership for natural monopoly social welfare maximization.
- It can often face Natural Monopoly Average Cost Pricing through natural monopoly regulatory mechanism.
- It can often create Natural Monopoly Universal Service Obligations for natural monopoly geographic coverage.
- It can often generate Natural Monopoly Cross-Subsidy between natural monopoly profitable routes and natural monopoly unprofitable routes.
- It can often require Natural Monopoly Rate-of-Return Regulation for natural monopoly investment incentive.
- It can often demonstrate Natural Monopoly Stranded Costs when natural monopoly technology changes occur.
- It can often face Natural Monopoly Cream-Skimming Threats in natural monopoly deregulated segments.
- ...
- It can range from being a Pure Natural Monopoly to being a Contestable Natural Monopoly, depending on its natural monopoly entry barrier strength.
- It can range from being a Local Natural Monopoly to being a National Natural Monopoly, depending on its natural monopoly geographic scope.
- It can range from being a Permanent Natural Monopoly to being a Temporary Natural Monopoly, depending on its natural monopoly technological stability.
- It can range from being a Strong Natural Monopoly to being a Weak Natural Monopoly, depending on its natural monopoly cost advantage magnitude.
- It can range from being a Single-Product Natural Monopoly to being a Multi-Product Natural Monopoly, depending on its natural monopoly scope economy.
- It can range from being a Regulated Natural Monopoly to being an Unregulated Natural Monopoly, depending on its natural monopoly government oversight.
- It can range from being a Public Natural Monopoly to being a Private Natural Monopoly, depending on its natural monopoly ownership structure.
- It can range from being a Network Natural Monopoly to being a Scale Natural Monopoly, depending on its natural monopoly cost driver.
- ...
- It can arise from Natural Monopoly Cost Structures in natural monopoly infrastructure industrys.
- It can require Natural Monopoly Regulatory Frameworks for natural monopoly consumer protection.
- It can face Natural Monopoly Technological Disruption from natural monopoly innovations.
- It can generate Natural Monopoly Deadweight Loss without natural monopoly price regulation.
- It can create Natural Monopoly Investment Challenges for natural monopoly infrastructure modernization.
- It can exhibit Natural Monopoly X-Inefficiency without natural monopoly competitive pressure.
- It can necessitate Natural Monopoly Access Regulation for natural monopoly facility sharing.
- ...
- Example(s):
- Utility Natural Monopolies providing natural monopoly essential infrastructure, such as:
- Water Distribution Natural Monopolies demonstrating natural monopoly pipe network economy, such as:
- Municipal Water Natural Monopoly with natural monopoly local pipe infrastructure serving natural monopoly residential customers.
- Regional Water Natural Monopoly managing natural monopoly watershed resources across natural monopoly multiple municipalitys.
- Wholesale Water Natural Monopoly operating natural monopoly trunk mains for natural monopoly bulk distribution.
- Electricity Distribution Natural Monopolies exhibiting natural monopoly grid economy, such as:
- Local Electricity Natural Monopoly maintaining natural monopoly distribution lines to natural monopoly end users.
- Transmission Grid Natural Monopoly operating natural monopoly high voltage networks for natural monopoly bulk power transfer.
- Rural Electricity Natural Monopoly serving natural monopoly low density areas with natural monopoly cross-subsidy.
- Natural Gas Natural Monopolies leveraging natural monopoly pipeline infrastructure, such as:
- Sewerage Natural Monopolies managing natural monopoly waste infrastructure, such as:
- Water Distribution Natural Monopolies demonstrating natural monopoly pipe network economy, such as:
- Transportation Natural Monopolies controlling natural monopoly transport infrastructure, such as:
- Railway Infrastructure Natural Monopoly owning natural monopoly rail networks with natural monopoly high fixed costs.
- Airport Natural Monopoly managing natural monopoly runway capacity in natural monopoly geographic markets.
- Seaport Natural Monopoly controlling natural monopoly deep water berths with natural monopoly dredging requirements.
- Highway Natural Monopoly operating natural monopoly toll roads with natural monopoly maintenance economy.
- Bridge Natural Monopoly controlling natural monopoly crossing points with natural monopoly construction cost.
- Tunnel Natural Monopoly managing natural monopoly underground passages with natural monopoly engineering cost.
- Telecommunications Natural Monopolies (historically), such as:
- Local Loop Natural Monopoly controlling natural monopoly last mile infrastructure (before natural monopoly wireless competition).
- Cable TV Natural Monopoly operating natural monopoly coaxial networks in natural monopoly franchise areas.
- Submarine Cable Natural Monopoly owning natural monopoly undersea infrastructure for natural monopoly international connectivity.
- Postal Natural Monopolies maintaining natural monopoly delivery networks, such as:
- Digital Platform Natural Monopolies exhibiting natural monopoly network effects, such as:
- Social Network Natural Monopoly where natural monopoly user value increases with natural monopoly network size.
- Operating System Natural Monopoly benefiting from natural monopoly developer ecosystems.
- Search Engine Natural Monopoly leveraging natural monopoly data scale advantages.
- Government Service Natural Monopolies, such as:
- Defense Natural Monopoly providing natural monopoly national security through natural monopoly military force.
- Police Natural Monopoly maintaining natural monopoly law enforcement in natural monopoly jurisdictions.
- Court System Natural Monopoly administering natural monopoly justice through natural monopoly legal framework.
- Specialized Infrastructure Natural Monopolies, such as:
- Stock Exchange Natural Monopoly providing natural monopoly trading infrastructure with natural monopoly liquidity benefits.
- Payment Network Natural Monopoly operating natural monopoly transaction processing with natural monopoly scale economy.
- Credit Bureau Natural Monopoly maintaining natural monopoly credit databases with natural monopoly information economy.
- Regional Natural Monopolies, such as:
- Canal Natural Monopoly controlling natural monopoly waterways like the Panama Canal Natural Monopoly.
- Pipeline Natural Monopoly operating natural monopoly oil pipelines across natural monopoly geographic corridors.
- ...
- Utility Natural Monopolies providing natural monopoly essential infrastructure, such as:
- Counter-Example(s):
- Competitive Market, where multiple competitive firms can operate efficiently without natural monopoly cost disadvantage.
- Artificial Monopoly, created through artificial barriers rather than natural monopoly cost structure.
- Legal Monopoly, established by government grant without natural monopoly economic justification.
- Cartel, where multiple cartel members collude rather than achieving natural monopoly single firm efficiency.
- Contestable Market, where potential competition prevents natural monopoly pricing power despite natural monopoly cost structure.
- Inefficient Monopoly, lacking natural monopoly cost advantages over competitive market structure.
- Temporary Monopoly, based on first-mover advantage without natural monopoly structural barriers.
- Patent Monopoly, deriving from intellectual property rights not natural monopoly economics.
- Brand Monopoly, based on consumer preference without natural monopoly cost advantage.
- Geographic Monopoly, resulting from location advantage without natural monopoly scale economy.
- See: Monopoly, Economies of Scale, Subadditivity, Average Cost Curve, Marginal Cost, Fixed Cost, Network Effect, Public Utility, Rate Regulation, Price Discrimination, Universal Service, Essential Facility, Barriers to Entry, Market Power, Deadweight Loss, X-Inefficiency, Regulatory Capture, Infrastructure Economics, Network Industry.
References
2014
- (Wikipedia, 2014) ⇒ http://en.wikipedia.org/wiki/natural_monopoly Retrieved:2014-8-2.
- A natural monopoly is a monopoly in an industry in which it is most efficient (involving the lowest long-run average cost) for production to be concentrated in a single firm. This market situation gives the largest supplier in an industry, often the first supplier in a market, an overwhelming cost advantage over other actual and potential competitors, so a natural monopoly situation generally leads to an actual monopoly. This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence creating high barriers to entry; examples include public utilities such as water services and electricity. [1] While in other situations a monopoly can lead to restricted output, higher-than-necessary prices, and production that is inefficient (at higher average cost) than would occur with many producers, a firm that is a natural monopoly produces at lower average cost than would be possible with multiple firms. This frees other potential competitors to put their resources to other profitable uses. [2]
Multiple product industries tend to create a negative externality that could otherwise be avoided if a Natural Monopoly producer were present. The reasoning is that natural monopolies provide a greater overall benefit to society versus a competitive market.
- A natural monopoly is a monopoly in an industry in which it is most efficient (involving the lowest long-run average cost) for production to be concentrated in a single firm. This market situation gives the largest supplier in an industry, often the first supplier in a market, an overwhelming cost advantage over other actual and potential competitors, so a natural monopoly situation generally leads to an actual monopoly. This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence creating high barriers to entry; examples include public utilities such as water services and electricity. [1] While in other situations a monopoly can lead to restricted output, higher-than-necessary prices, and production that is inefficient (at higher average cost) than would occur with many producers, a firm that is a natural monopoly produces at lower average cost than would be possible with multiple firms. This frees other potential competitors to put their resources to other profitable uses. [2]
- ↑ Perloff, J, 2012. Microeconomics, Pearson Education, England, p. 394.
- ↑ Competitive Enterprise Institute. The Problem with Predation. http://cei.org/news-letters-cei-planet/problem-predation. webpage. 4/22/14
- (Wikipedia, 2014) ⇒ http://wikipedia.org/wiki/Monopoly#Natural_monopoly Retrieved:2014-8-2.
- A natural monopoly is a company that experiences increasing returns to scale over the relevant range of output and relatively high fixed costs.[1] A natural monopoly occurs where the average cost of production "declines throughout the relevant range of product demand". The relevant range of product demand is where the average cost curve is below the demand curve.[2] When this situation occurs, it is always cheaper for one large company to supply the market than multiple smaller companies; in fact, absent government intervention in such markets, will naturally evolve into a monopoly. An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic.[citation needed] Fragmenting such monopolies is by definition inefficient. The most frequently used methods dealing with natural monopolies are government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices.[3]
To reduce prices and increase output, regulators often use average cost pricing. By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve.[4] This pricing scheme eliminates any positive economic profits since price equals average cost. Average-cost pricing is not perfect. Regulators must estimate average costs. Companies have a reduced incentive to lower costs. Regulation of this type has not been limited to natural monopolies. Average-cost pricing does also have some disadvantages. By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price exceeds the marginal cost (which is the output quantity for a perfectly competitive and allocatively efficient market).
- A natural monopoly is a company that experiences increasing returns to scale over the relevant range of output and relatively high fixed costs.[1] A natural monopoly occurs where the average cost of production "declines throughout the relevant range of product demand". The relevant range of product demand is where the average cost curve is below the demand curve.[2] When this situation occurs, it is always cheaper for one large company to supply the market than multiple smaller companies; in fact, absent government intervention in such markets, will naturally evolve into a monopoly. An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic.[citation needed] Fragmenting such monopolies is by definition inefficient. The most frequently used methods dealing with natural monopolies are government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices.[3]