Natural Monopoly Case Studies Example

The concept of a “Natural Monopoly” relates to monopoly in general and still constitutes its special type. Natural monopoly occurs due to objective reasons and represents a situation where the demand for certain product would be better and more efficient met by one or few entities. Natural monopoly is usually caused by specific manufacturing technology and customer service, so under such circumstances the competition is impossible or undesirable. In 1977 William Baumol presented a classic definition for natural monopoly, “ an industry in which multiform production is more costly than production by a monopoly” (As cited in Yevdokimov, 2012, p. 81). Additionally, he explained “the cost efficiency aspect of natural monopoly” by providing the case where a large business entity would be able to satisfy the entire market’s demand and be more cost efficient than various smaller companies. It’s noteworthy that Baumol’s concept of natural monopoly has contributed to the development of many regulatory programs and much economic study on infrastructure industries (Jamison, 1997, p. 2). Generally the main features of natural monopoly are as follows:

Natural monopolies’ actors can run business more effectively in case there is no competition, which enables economies of scale.

High barriers to enter the market.
Low demand’s elasticity since the demand for the products/services produced/provided by natural monopolies is less dependent on price changes than the demand for other types of products, as the first ones can be hardly replaced.

The network nature of the market’s organization (Posner, 1999).

In fact, natural monopolies are typical for so called “essential services’ markets” – electricity grid, gas network, and water supply, railway infrastructure, known also as public utilities. Telephone, cable or broadcasting companies could serve as less acceptable examples of natural monopolies. To justify my opinion and illustrate that telecommunication services do not fall within a traditional concept of natural monopolies, I’d like to match their corresponding characteristics. First of all, in case of a natural monopoly market supply is generated by one powerful entity and we can observe ongoing public demand. If we look at the telecommunication services market, several influential telecom operators will be easily determined. Secondly, in case of a natural monopoly there are no observable substitutes for the goods they produce or services they provide. For instance, total refusal from conventional gas in favor of biogas seems to be hardly probable. On the contrary, new forward looking telecommunication services are being developed and the competition degree is increasing in this market sector. Thirdly, if we are considering a natural monopoly, market entry for new potential producers or providers can happen to be very difficult due to significant restrictions and high barriers. At the same time if a new business entity dealing with telecommunication services wishes to enter the market, it won’t be very burdensome to overcome the existing barriers.
The last but not least distinction I’d like to mention concerns economies of the scale. In case of a natural monopoly there is a significant reduction in production costs per unit of product while increasing overall production. Whereas in contrast a constant updating of technologies used by new telecommunication services’ providers entering the market leads to a steady decline in the cost of providing services.

References

Bolick, C. (1984). Cable Television: An Unnatural Monopoly. Cato Policy Analysis, (34). Retrieved March 12, 2015, from http://www.cato.org/pubs/pas/pa034.html
Jamison, M. (1997). A Further Look at Proper Cost Tests for Natural Monopoly. Retrieved from http://warrington.ufl.edu/centers/purc/purcdocs/papers/9703_Jamison_A_Furthur_Look.pdf
Posner, R. (1999). Natural monopoly and its regulation. Washington, D.C.: Cato Institute.
Yevdokimov, Y. (2012). Monopoly and Market Power. In Practical Guide To Contemporary Economics. Ventus Publishing ApS.