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How are the natural monopolies different than the regular monopolies? Should there really be this...

Question:

How are natural monopolies different than regular monopolies? Should there really be this difference?

Monopoly:

A monopoly is one of the market structures under the market theory having the following characteristics:

  • A single seller with many buyers for the product.
  • Existence of entry barriers due to the high cost of the inputs.
  • The product sold does not have any close substitutes.
  • A monopoly is a price maker and can exercise price discrimination for different market segments

A monopoly is formed due to the existence of the following conditions:

  1. Control of a key resource by one firm.
  2. Economies of scale where the cost of production is at minimum when only one firm is producing and increases if other firms join in.
  3. The existence of legal barriers through government intervention which grants a particular firm the licences and copyrights for production.

Answer and Explanation:

Difference between natural monopolies and regular monopolies.

A natural monopoly is a firm that possess high economies of scale that enable it produce output at a far lower cost than any smaller competitor. When such a firm exists, the presence of government regulation is crucial for determining the price structure. Examples of natural monopolies are in the utilities and software industries. Natural monopolies tend to have their average cost curves decline over a relevant span of output quantities. A firm with high fixed costs relative to its marginal costs will have declining average costs for a significant range of output.

A regular monopoly exists where only one firm is the sole source for a product and there are no close substitutes for the product available. Regular monopolies are relatively rare and for one to exist the conditions stated earlier must be met.

  1. Control of a key resource by one firm.
  2. Economies of scale where the cost of production is at minimum when only one firm is producing and increases if other firms join in.
  3. The existence of legal barriers through government intervention which grants a particular firm the licences and copyrights for production.

Natural monopolies exist more frequently than regular monopolies, mainly because the requirements aren't as stringent.


Learn more about this topic:

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Natural Monopoly in Economics: Definition & Examples

from Intro to Business: Help and Review

Chapter 3 / Lesson 13
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