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NATURAL MONOPOLY

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Definition:
A natural monopoly exists in a particular market if a single firm can serve that market at lower cost than any combination of two or more firms.

Natural monopoly arises out of the properties of productive technology, often in association with market demand, and not from the activities of governments or rivals (see monopoly).

Generally speaking, natural monopolies are characterized by steeply declining long-run average and marginal-cost curves such that there is room for only one firm to fully exploit available economies of scale and supply the market.

Context:
In essence natural monopolies exist because of economies of scale and economies of scope which are significant relative to market demand. Natural monopolies are thought to exist in some portions of industries such as electricity, railroads, natural gas, and telecommunications. Because productive efficiency requires that only one firm exist, natural monopolies are typically subject to government regulation. Regulations may include price, quality, and/or entry conditions.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Hyperlink:
http://www.oecd.org/dataoecd/8/61/2376087.pdf

Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Monday, March 10, 2003