Natural Monopoly

A monopoly can arise due to declining cost of production for a particular product. In such a case the average cost pf production falls and reaches a minimum at an output level that is sufficient to satisfy the entire market. In such an industry, rival firms will be eliminated until only the strongest firm (now the monopolist) is left in the market. This is often called a case on natural monopoly.

This type of cost advantage is important enough to merit special attention. In some industries, economies of large-scale production or economies from simulta­neous production of a large number of items (for example, car motors and bodies, truck parts, and so on) are so extreme that the industry's output can be produced at far lower cost by a single firm than by a number of smaller firms. In such cases, we say there is a natural monopoly, because once a firm gets large enough relative to the size of the market for its product, its natural cost advantage may well drive the competition out of business whether or not anyone in the relatively large firm has evil intentions.

A monopoly need not be a large firm if the market is small enough. What mat­ters is the size of a single firm relative to the total market demand for the product. Thus a small bank in a rural town or a gasoline station at a lightly traveled intersec­tion may both be monopolies even though they are very small firms.

. Hence a monopoly may arise "naturally" even in the absence of barriers to entry. Once the monopoly is established the economies of scale act as a very effective deterrent to entry because no new entrant can hope to match the low average cost of the existing. A good example of a natural monopoly is the electricity industry. The electric power industry reaps benefits of economies of scale and yields decreasing average cost. A natural monopoly is usually regulated by the government.

THE ECONOMICS OF MONOPOLY.

Generally speaking, price and output decisions of a monopolist are similar to those of a monopolistically competitive firm, with the major distinction of a large number of firms under monopolistic competition and only one firm under monopoly. Thus, one may technically say that there is no competition under monopoly. This is not strictly true, as even a monopolist is threatened by indirect and potential competition. Like monopolistic competition, a monopolistic firm also maximizes its profits by producing up to the point where marginal revenue equals marginal cost. As the monopolist is a price maker and can increase the amount of sales

by lowering the price, a monopolist does not lure consumers away from rivals, rather he or she induces them to buy more. Nevertheless, at any output level, the price charged by a monopolist is higher than the marginal revenue. As a result, a monopolist also does not produce to the point where price equals marginal cost (a condition met under a perfectly competitive market structure).

DESIRABILITY OF MONOPOLY.

An industry characterized by a monopolistic market structure produces less output and charges higher prices than under perfect competition (and presumably under monopolistic competition). Thus, on the basis of price charged and quantity produced, a monopoly is less desirable socially. However, a natural monopoly is generally considered desirable if the monopolist's price behavior can be regulated.

So, can anything good be said about monopoly?

Except for the case of natural monopoly—where a single firm offers important cost advantages —or the case of a monopoly obtained through an inventor's patent, which is designed to encourage innovation, it is not easy to find arguments in favor of monopoly. However, the preceding comparison of monopoly and perfect competi­tion is very artificial. It assumes that all other things will remain the same, even though that is unlikely to happen in reality.

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