Updated: 2006-09-30 15:01

- Efficiency monopoly

An efficiency monopoly exists when a firm is satisfying consumer demand so well that profitable competition is extremely challenging. It is not the result of government granted privilege, subsidies, regulations, etc. To maintain its monopoly position it must make pricing and production decisions knowing that if prices are too high or quality is too low that competition may arise from another firm that can better serve the market. It is often described as a situation where a firm is able to keep production and supply costs lower than any other possible competitor so that it can charge a lower price than others and still be profitable. Since potential competitors cannot match the monopoly's efficiency, they are not able to charge a lower, or comparable, price and still be profitable.

- Natural monopoly

A natural pool is a monopoly that arises in industry where economies of scale are so large that a single firm can supply the entire market without exhausting them. In these industries competition will tend to be eliminated as the largest (often the first) firm develops a monopoly through its cost advantage. In these industries monopoly may be more economically efficient than competition, although because of potential dynamic efficiencies this is not necessarily clear-cut.

Natural monopoly arises when there are large capital costs relative to variable costs, which arises typically in network industries such as electricity and water. It should be distinguished from network effects, which operate on the demand side and do not affect costs. Counter-intuitively, the case of a monopolization of a key source of a natural resource is not considered a natural monopoly, because it is based on the running down of natural capital rather than the amortization of an investment in physical or human capital.

Whether an industry is a natural monopoly may change over time through the introduction of new technologies. A natural monopoly industry can also be artificially broken up by government, although (eg electricity liberalization, eg Railtrack) the results are at best mixed. Advocates of free markets, such as stout libertarians, assert that a natural monopoly is a lot of practical impossibility, and, given that a monopoly is a persistent rather than a transient situation, that there is no historical precedent of one ever existing. They say that the idea of "natural monopoly" is mere theoretical abstraction to justify expanding the scope of government, and that, in the case of nationalization or deprivatization, it is the government intervention itself that creates a monopoly where one did not actually exist.


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