Natural Monopolies

Natural Monopolies

A natural monopoly is an industry in which the most efficient number of firms serving the market is one. Generally, these industries have substantial fixed costs that generate large economies of scale. For example, consider a local water service provider. If only one provider serves a residential area, only one set of water mains/pipes are needed. If multiple providers serve the area, multiple mains/pipes are needed, likely doubling the cost of providing the same degree of water service to the neighborhood. Typically, investor-owned natural monopolies deemed providers of essential services to a local area, such as local water, natural gas, electricity or garbage companies, are regulated by a Public Utilities Commission (PUC). The PUC normally sets prices or tariffs the utility is allowed to charge, equal to cost plus a normal return on investment.

In this Discussion, you will revisit an industry from the Week 3 Discussion and discuss which type of market structure it is, how firms in this industry compete, and whether or not some firms can profit in this industry in the long run.

To prepare for this Discussion:

• Review this week’s Learning Resources.
• Review an industry that either you or one of your colleagues identified for the Discussion in Week 3, and consider which of the three market structures included in this week’s Learning Resources (monopolistic competition, oligopoly, or monopoly) best characterizes the industry.
• Review the Academic Writing Expectations for 1000-Level Courses, provided in this week’s Learning Resources.

By Day 3

Post a 150- to 225-word (2- to 3-paragraph) explanation of your selected industry’s market structure, including support for your assertion. In your explanation, also address the following:

• How do firms compete with each other in the industry, both in terms of price and non-price competition?
• Are some firms in the industry able to earn economic profits in the long run? Why or why not?
• To support your response, be sure to reference at least one properly cited scholarly source.