Natural monopoly

A natural monopoly is a monopoly that arises from the nature of an industry. The commonest reason for the existence of a natural monopoly is that it uneconomic to replicate expensive infrastructure.

The most obvious examples of a natural monopolies are utilities such as gas, electricity and water - at least at the level of distribution to consumers.

It is fairly clear that it would not be practical to create a competitive market for water supplies by encouraging several companies to each build its own network of everything from reservoirs to pipes running to customers. It would be far more expensive than having a single system built by a monopoly supplier.

It is not always clear what is a natural monopoly. A few decades ago it would have appeared that telecoms was a natural monopoly. It now appears to merely be susceptible to network effects. These have largely been effectively countered (at least in the EU) by requiring inter-operability between networks at regulated prices and giving competitors access to incumbent telecoms companies infrastructure.

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