Natural Monopoly
AdvancedA natural monopoly is a market in which a single supplier can serve the whole market at a lower cost than two or more competing suppliers could, usually because of very high fixed costs and large economies of scale.
Some industries require enormous upfront investment in infrastructure, such as water pipes, electricity grids, gas networks and railway tracks. Once built, the cost of serving additional customers is low. Duplicating the network would be wasteful, so one supplier is the most efficient arrangement.
For example, it would make little sense for two companies to lay separate water pipes to every home in a city. A single network can serve everyone more cheaply.
Natural monopolies create a problem: without competition, the single supplier could charge high prices and provide poor service. Governments typically respond by owning these businesses, or by regulating them, setting limits on prices, quality standards and investment requirements.
In some sectors, governments have separated the natural monopoly part, such as the electricity network, from parts where competition is possible, such as electricity generation and retail supply. Technological change can also end natural monopolies, as happened with parts of telecoms.
For worked examples and full lessons, visit notesbysara.org.