Small producers obviously can never compete with the more significant, lower-cost producer because their costs are higher. Secondly, large-scale production is so much more useful than small-scale production, that a single large producer is sufficient to meet all market demand available. Manufacturing plants, advanced machinery and equipment are all fixed assets which, due to their high costs, may prevent a new company from entering an industry. The high entry barriers are often due to a large amount of capital or cash needed to purchase fixed assets which are physical assets that a business needs to operate. Natural monopolies, however, take place in two forms.įirstly, a business takes advantage of the high barriers to entering a market to build a "moat," or defensive wall, around its business operations. Natural monopolies are allowed when a single company can supply a product or service at a lower cost than any potential competitor but are often heavily regulated to protect consumers.Īs the name implies, a natural monopoly is, over time, a monopoly due to market conditions and without any unfair business practices that might stifle competition.Ĭollusion may involve two competing rivals working together to obtain an unfair market advantage by arranging price-fixing or raising. A company with a natural monopoly could be the only supplier in a market, geographic location, a product, or service.Ī natural monopoly is that monopoly which occurs in an industry where high infrastructural costs and other barriers, relative to market size, give an overwhelming advantage over potential competitors to the biggest supplier in an industry, often the first supplier in a market. Understanding Natural MonopolyĪ natural monopoly is a form of monopoly that occurs in a given industry due to the high start-up costs or powerful economies of scale of conducting business. Examples of the natural monopoly include public utilities, such as water services and electricity. It often occurs in industries where capital costs are predominate, creating economies of big-scale concerning the size of the market. A natural monopoly is a kind of monopoly that arises due to natural market forces.
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