The formation of other types of monopolies, such as a pure or artificial monopoly – in contrast to a natural monopoly – is attributable to an “unfair” advantage. Learn More → Natural Monopoly Glossary Term ( OECD) Natural Monopoly vs. If multiple companies were to enter the market, due to the high cost of entry, their average prices would actually exceed current pricing levels and not be competitive with that of the natural monopolist. Simply put, the natural monopolist can meet the demand of the entire market at a lower cost than multiple firms, i.e. The most common characteristics of a natural monopoly are the following: What are the Characteristics of Natural Monopoly? More specifically, the market is unfavorable to enter from an economic standpoint because it’ll likely take decades and a large monetary investment for the new entrant to develop a noticeable presence in the market. In effect, it is impractical for the industry to have more competitors attempt to sell the same product or service, which is the reason for the lack of competition. Practically all natural monopolies will share one common trait, which is a high fixed cost structure. the minimum consumer demand in the market is set much higher. In order for any new entrant to become profitable, production must be done on a large enough scale, i.e. In economics, a market characterized as a “natural monopoly” will be characterized by a single company that can operate more efficiently than the rest of the entire market.Įfficiency in this particular context is in reference to a significant cost advantage in which a particular company is capable of producing a product or service for much less, enabling it to benefit from higher profit margins than its competitors. What is the Definition of Natural Monopoly? economic moat, that exists due to the market’s high fixed costs of distribution for production and a greater need for scale for its business model to be sustainable over the long run. Instead, the company – deemed a “natural monopolist” – possesses a long-term competitive advantage, i.e. The emergence of a natural monopoly is rarely from ownership of proprietary technology, patents, intellectual property, and related assets, nor is it from unfair business practices or unethical corporate behavior prone to anti-trust regulations. A Natural Monopoly occurs when a single company can produce and offer to sell a product or service at a lower cost than its competitors can, resulting in practically no competition in the market.
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