Natural Monopoly Definition: 3 Natural Monopoly Examples

A monopoly occurs when a single company has total control of a sector of the market. Once a company gains entire market share, there’s a high likelihood they might engage in high cost pricing for their products, as there aren’t any competitors trying to sell goods at lower prices.

Especially when it arises via hostile takeovers, mergers, and the like, monopoly power can sometimes come with a high total cost for consumers and society as a whole.

A natural monopoly is a company that controls an entire sector of the market because of the innate nature of that market, rather than through a hard-won struggle. Natural monopolies often exist in tandem with government involvement and regulation.

Some natural monopolies are economies of scale (i.e., they save money as they increase production), others are economies of scope (i.e., the cost of producing a certain type of good reduces internal costs for producing other types of goods). Some natural monopolies combine both attributes. In any of these scenarios, the average total cost of production is lower for a single company than it would be for competing entities.

Certain types of infrastructure are so far-reaching and cumbersome they only lend themselves to control by a single firm. Similarly, some industries have such high start-up costs, whoever moves into them first becomes a de facto monopoly, as securing the assets necessary to compete is nearly impossible.

Natural monopolies can ease distribution and make key public goods easier to access for consumers. Here are three pros to consider:

• Greater efficiency: In a natural type of monopoly, governments often work alongside single firms to achieve allocative efficiency with a public good. In other words, everyone who needs or demands a good gets it as fast as possible.
• Lower costs: The long-run average cost curve of a natural monopoly often slopes downward for both the business itself and its consumers. Government regulation is often responsible for this—the state steps in to enforce lower prices and prevent high fixed costs (a pitfall common to more artificial monopolies). Some natural monopolies might arrive at lower marginal cost pricing by themselves rather than needing government handouts or regulation to achieve the same goal.
• Wider reach: If consumers need a good distributed over a vast geographic location, natural monopolies and oligopolies can often do so more effectively than a wide array of competing companies. As scale economies, natural monopolies save money as they increase production of goods. Distributing goods to as many consumers as possible helps them achieve this goal as quickly as possible.

Natural monopolies still present some potential concerns. Here are three cons to keep in mind:

• Centralized control: At least in theory, natural monopolies can fall prey to some of the worst impulses of artificial monopolies. When a company gains total centralized control, they can pass on higher prices to consumers without fear of reprisal. In some cases, government subsidies cover capital costs for natural monopolies, reducing a company’s urges to behave unscrupulously. Additional regulation further precludes this possibility.
• Less consumer choice: The elasticity of the demand curve remains fairly static with natural monopolies since consumers often need the products and also can’t go to any provider to get them. Competition could, at least theoretically, introduce more variable costs and additional features into the mix to increase consumer choice.
• Limited competition: Natural monopolists, whether deliberately or incidentally, place many barriers to entry for potential competitors in their industries. Potential entrants will have a hard time raising the necessary capital to compete, and these high prices naturally crowd out competition as a result.

Natural monopolies exist in a host of different sectors. Consider these three examples for a start:

1. 1. Public utilities: Governments and natural monopolies often work hand in hand to ensure everyone has access to natural gas, electric power, telecommunications potential, and the like. Utility companies—often natural monopolies—have a vested interest in maintaining the infrastructure for these public goods (pipelines, electrical grids, and so on) in top shape.
2. 2. Tech firms: Certain tech companies and social media sites are veering toward total monopoly power of their distinct business sectors. Since they were the first to enter their industries and created their own digital infrastructure, economists argue as to whether they represent artificial or natural monopolies.
3. 3. Water services: As a brief example of a natural monopoly, think of a local water company. To supply water to a wide locale, you need both a large-scale initial investment in infrastructure as well as control of the water supply to effectively meet market demand. In other words, it’s more efficient to allow a single company to act as a water monopoly than to encourage widespread competition.

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