Natural Monopolies

Unlike the examples of monopolies we have studied so far, natural monopolies do not rely on threats, collusion, or hostile takeovers. Instead, a natural monopoly occurs in an industry where one firm can supply goods or services to a market at a lower cost than could two or more firms.

This is due to very high start-up costs of creating a competing business in a specific industry. It is rare to see one, but they do exist, as a single player in an industry. Since it is economically sensible to have a natural monopoly in an industry that supports one, the government allows them to exist, while placing regulations to ensure that consumers do not get cheated.

The most common examples of natural monopolies are utilities such as railroads, pipelines, water supply systems, etc., since these industries are characterized by high costs of production. Having additional firms would be inefficient, as each would have to go through the high costs of duplicating the facilities to compete.

A natural monopoly also takes care of itself in many instances. Advocates of laissez faire capitalism point out that monopolists sometimes find it in their best interest to limit their own monopolistic behavior, for fear of having competitors joining into the market. Some intentionally keep prices low, close to what they would be if there was competition in the market.

Pro sports leagues can also be argued to be natural monopolies. It would not make sense to have 2 different hockey leagues in the United States, with top talent being split between the two leagues. Whether there were one or two teams in the city of Boston, the overall number of fans would be roughly the same, and the total revenue would not change by much, while the costs would nearly double as two teams would require two arenas and much more to go with it. With baseball, two different leagues, the NL and AL, remained as separate entities before finally merging to become today's MLB in 2000.




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Comments

  1. AnonymousApril 2, 2019 at 12:35 AM

    Interesting blog post! I think the example of the sports merging is an interesting way to look at natural monopolies. It prompted me to go look for other examples of natural monopolies and I think one interesting example I found was the airplane industry. Currently, two primary companies build airplanes world wide, so while it's more of a "duopoly" technically speaking, the input of fixed costs still lends itself to being more like a natural monopoly.

    https://www.intelligenteconomist.com/natural-monopolies/

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