What is natural monopoly, what are the examples of it, and how does it work?
We will be discussing natural monopoly as well as its advantage and disadvantage. What are the industries dominating in our society today?
Is monopoly good for business as it takes away competition and consumers are only left with a single option?
Well, it has its advantages and disadvantages. Of course, other small businesses are affected by the issue of natural monopoly. While top companies may be benefiting financially because of their status, there is a need for competition in the market.
What Is a Monopoly?
A monopoly occurs once a company dominates and controls an entire sector of the market.
When a company achieves this, there is a possibility they may engage in high-cost pricing for their product. They own the market without other companies competing for the same status.
The market is always open for competition, but when a company has a monopoly, there isn’t any competition to speak of.
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What Is a Natural Monopoly?
A natural monopoly is a company that dominates and controls an entire sector of the market because of the nature of the market.
Natural monopolies can occur in industries where raw materials are needed. A company may be the only provider of a product or service in an industry or location.
Sometimes these companies acquire this status because of government involvement and regulations. Hence, other companies are unable to compete with such companies.
How Does Natural Monopoly Work?
A natural monopoly is a type of monopoly which gives a company an advantage as the only provider of goods are services in an industry.
A natural monopoly occurs when a company or organization dominates and controls an entire sector of the market. This type of monopoly eradicates any form of competition in the market.
Companies with this status aren’t worried about business rivals taking over the market. This type of monopoly prevents any potential rival from competing in the market as a result of the high cost of starting up.
There are other barriers preventing other business rivals to enter the market.
Advantages and Disadvantages of Natural Monopolies
Natural monopoly has its advantages and disadvantages, how it affects a business, and consumers’ choice for goods and services.
Advantages
One of the advantages of natural monopolies involves the use of an industry’s limited resources efficiently to provide the lowest unit price to consumers. They become an advantage when a company can offer their services and supply their products at a lower cost and at a pace that satisfies demands in the market.
Disadvantages
On the flip side, one of the disadvantages of natural monopolies is eliminating the competition in the market, depriving consumers of the opportunity to make different choices.
Natural monopolies do not only prevent rivals in the market, but it also makes customers rely on one provider for goods and services.
A company that has a natural monopoly prevents potential rivals from entering the market. They sometimes have this status because of government involvement and certain regulations.
With one provider in the market, there is no completion and this could be bad for business.
Natural Monopoly Examples
Examples of natural monopolies include;
#1. Electricity
It’s unwise to set up another electricity grid after initially installing one in the first place. If the already established electric grid is functioning at full capacity, setting up another grid is useless.
This makes electricity transmission an example of a natural monopoly.
#2. Utility Industries
The utility industry is another example of a natural monopoly. The utility monopolies are responsible for providing electricity transmission, sewer services, water, and energy distribution like natural gas transmission to communities, towns, and cities.
The cost to set up utility plants and the distribution of services are tremendous. This is the main reason why there aren’t any potential competitors in this industry.
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#3. Internet Provider
A service platform may use its monopoly over online interactions, information, and commerce to exercise excessive influence over what society can see or sell online.
#4. Railroads
Generally, the railroad industry is backed by the government, which means that their natural monopolies are allowed.
The railroad industry cannot support other industries, because of the unique resources involved. These resources include land for railroad tracks, train stations, and structures which require a high cost.
#5. Telephone Companies
One of the examples of a natural monopoly is telephone companies.
Telephone companies that provide landline services are required to offer their services to communities within their territory phone service. They will in no way discriminate against the customers based on the content of their phone conversation.
#6. Digital Platforms
Platforms like Uber have a huge influence over their market. They have natural monopolies, why, because of their price and service.
They provide better technology, network economies, and average price for their services.
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#7. Public Education System
It cost more to build schools, employ teachers, equip every facility, develop a curriculum, and maintain a specific level of providing education. Because of this, public education remains a natural monopoly.
Government involvement is the primary reason public education is a natural monopoly.
#8. Postal Services
Postal services are an example of natural monopolies. An organization set up by the government with a huge capital investment. It will be difficult for a private business to operate this service.
The requirements for a successful operation include post offices, sorting facilities, delivery routes, employing mailmen, logistics, etc.
Additionally, postal services must reach every person in every location irrespective of the terrain or weather.
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#9. Tech Firms
Some tech companies and social media companies want total monopoly power. Since some of these companies were the first to enter their industries and set up their own digital infrastructure, some experts may argue if they represent artificial or natural monopolies.
Examples of natural monopolies include social media platforms, online retailing, and search engine. We are talking about companies like Meta (formerly Facebook), Google, and Amazon.
#10. Hospitals in Rural Areas
The geographical location of these areas is the main factor they lack specific basic amenities. Building hospitals in rural areas can be quite challenging for private organizations.
Only the government can build hospitals in these areas and provide medical supplies.
Frequently Asked Questions
Below are some frequently asked questions on examples of natural monopolies.
What Is a Monopoly?
A monopoly occurs once a company dominates and controls an entire sector of the market.
When a company achieves this, there is a possibility they may engage in high-cost pricing for their product. They own the market without other companies competing for the same status.
What is an example of a natural monopoly?
The Power Company is an example of natural monopolies. Other examples of a natural monopoly include postal services, the railroad industry, hospitals in rural areas, etc.
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Which industries are examples of natural monopolies?
The top industries that are examples of natural monopolies are the utility and transportation industries. Every household within a community needs utilities like water, power, and communication.
Conclusion
Some experts will say that a monopoly is bad for business. Natural monopolies come with its advantage and disadvantage.
Certain natural monopolies require high costs to establish, which can only be achieved with government involvement.
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References
- Helfulprofesor: 10 Natural Monopoly Examples
- Investopedia: Natural Monopoly: Definition, How It Works, Types, and Examples
- Mater Class: Natural Monopoly Definition: 3 Natural Monopoly Examples
- Study: Natural Monopoly Examples | What is a Natural Monopoly?
- JSTOR: Natural Monopoly and Its Regulation
