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What is a Natural Monopoly?

By Jason C. Chavis
Updated May 17, 2024
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A natural monopoly is an economic situation in which the chief supplier of a particular good or service essentially has complete control over the marketplace. This occurs most readily when an industry is either in its infancy or other companies have unsuccessfully attempted to garner a significant market share. Other causes of a natural monopoly are prevalent when all competition has been driven out of business.

Usually, these types of market conditions are considered a legal monopoly and therefore highly regulated by the government. This is most common in the field of public utilities such as waste disposal and gas services, when one company has become so large that it effectively drove out all competition. In order to cap the prices so consumers can afford the utilities, the companies work with government agencies to regulate standard costs of service.

According to the economics of scale, a company will reach a natural monopoly when that business has penetrated market share to a degree that it has reduced the cost of doing business to a degree that competition cannot match. Essentially, no other company in the market can feasibly start a rival business and attempt to match or undercut the price of the monopoly. This holds true no matter the type of business as long as the firm has near complete control over the market.

When a bureaucratic organization intervenes in a natural monopoly, it possesses a number of options with how to regulate the prices of the product or service. These options range from letting the company regulate itself to taking public ownership of the firm. Usually, government entities involve themselves in a limited fashion by regulating the amount of profit the company can make, such as price fixing the rate of return at 10 percent. Governments can also intervene with legislation and set up competition managed by itself or even simply seize the company and turn it into a public works. Other options include breaking up the company into smaller firms, as was the case with the telephone company AT&T® in the United States in 1984.

The existence of natural monopolies in a free market society is a basis for debate amongst economic theorists. Certain economists argue that monopolies are only theoretical in such societies and thus can be subject to competition when the market demands. People who take this position believe in no government regulation. On the other end of the spectrum, are those who feel a natural monopoly can occur even when multiple companies exist. For example, Coke® and Pepsi® control the vast majority of the soda industry and charge roughly the same price for the products.

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Discussion Comments
By Logicfest — On Mar 25, 2014

@Soulfox -- but there are some good things that come with monopolies. For example, with a dozen different trash companies, how could you ever get them to agree to a uniform, sensible recycling program? Similarly, what about a city wide trash pickup that allows people to get the junk out of their garages they've been flinging in them for months?

Having such uniform and beneficial programs are difficult if you have a dozen trash collection companies that can't agree on anything? When it comes to trash collection (and some other things), a monopoly that is highly regulated so that prices and service are kept at levels that benefit consumers can be a better for customers.

Having said all of that, we also see where consumers have benefited by monopolies being broken up by the government. The AT&T case sited in the article is a great example. The result from that breakup was that phone bills dropped because competition was in the market and phone service remains inexpensive.

By Soulfox — On Mar 25, 2014

Monopolies are rarely good, whether they are "natural" or not. In my county, we have a dozen different trash collection companies that all compete with each other on both price and service.

Rates to high? Cut your trash collection company and get a new one. Trash hasn't been picked up for two weeks? Again, cut your trash collection company and get a new one.

In a monopoly situation, companies simply charge as much as the market will bear. No, thank you.

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