In-depth Analysis: Natural Monopoly Compared to Other Market Models

This report provides a comprehensive analysis of natural monopoly, distinguishing it from other market structures like monopoly and oligopoly. It defines natural monopoly as a market condition where a single firm can meet the entire market demand at a lower price due to high start-up and fixed costs, often arising from special raw material requirements or technological advancements. The report contrasts this with normal monopolies, where a single supplier dominates the market, and oligopolies, where a few sellers offer similar or differentiated products. Key differences are highlighted in terms of the number of players, product differentiation, competition levels, and price control. The report concludes that natural monopolies, often regulated by the government, are distinct due to their inherent economic efficiencies and the need to prevent unregulated price hikes, citing examples like water services, electricity, and railways. Desklib offers a platform for students to access similar solved assignments and study resources.

Running Head: Economics Assignment
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Contents
Introduction.......................................................................................................................3
Natural monopoly.............................................................................................................3
Difference of natural monopoly from normal monopoly and oligopoly..........................4
Conclusion........................................................................................................................7
References.........................................................................................................................9

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Introduction:
The report focuses on the different type of monopolies and their impact on the market
position and the economical position of a country. Monopoly is the market condition which
exists when there is only one enterprise or a specific person is there in the market to supply a
particular product or the service. This condition explains that the control on the market is
only in the hand of the one person. The market structure explains that the market is
characterized by a single seller which sells the unique products and the services in the market.
In this market structure, there is no competition as the trader is the only person in the market
who is selling the products.
Natural monopoly:
Natural monopoly is the market position where the one firm sells the raw material,
technology, products, services etc in the market and meet the entire demand of the market
along with lower price. This kind of market is built in that situation when one producer or
supplier is enough for the market to sell the products and the services. This kind of monopoly
is existed due to high start up and fixed cost of starting the business in a particular industry
(Mosca, 2008). Natural monopolies could arise in the industry because of special raw
material requirement, technology advancement etc. Since, these kind of businesses are
economically sensible thus the government allows such kind of business to exist but some
special regulations are implied on the business to ensure that the fair price could be levied on
customers.
Water services are among the best examples of natural monopoly. A company which
offers the water which is used to drink and used in the kitchen is the perfect example of
natural monopoly. Existing of two, three or four companies of water supply in one city would
cause the waste of money and the inefficiency of operations as one company could easily
supply the water throughout the city (Vikharev, 2013). At the same time, this business also
applies additional cost to lay the proper machineries and the infrastructure, proper treatment
facilities, hiring the enough qualified staff etc which leads to huge set up and starting cost to
the company. It is a classical situation where a lesser cost is prepared at the situation of only
one provider in the market.

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(Vikharev, 2013)
The water services example explains that the natural monopoly is the position which
is created by the government to manage the cost and eliminate the level of the wastage in the
country. This monopoly is created for the betterment of the business.
Difference of natural monopoly from normal monopoly and oligopoly:
On the basis of the above study, it has been found that the natural monopoly is the
type of monopoly which exists because of high start up cost and this kind of monopoly is
created with the permission of the government. However, the normal monopoly and
oligopoly are quite different from the natural monopoly (Elberse, 2008).
Monopoly business are the one where only a single supplier is existed in the market
and supplying the products and services to the customers. In order to the regulations, it is the
market structure where power exists when the single trader controls more than 25% of the
market share (Pepall, Richards and Norman, 2008). For example: the Microsoft owns the
windows operating system brand falls in the category of the monopoly business. The natural
monopoly business could be understood through below given graph:

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(Askar, 2013)
The evaluation on the monopoly segment explains that if there is no substitute product
in the market than the organization would be able to generate higher profits from the market.
Basically such kind of business focuses on the long run profits.
In addition, the oligopoly market has been studied and it has been found that the
oligopoly is the market structure where few sellers and traders are existed in the market and
sells the different products or substitute products or the nearly differential products. There are
only few businesses in the market which operates in that market and thus the sellers of the
company are quite influenced because of the other seller’s activities. It is that state of the
market where the entire market is shared by small number of manufacturer and the traders. A
monopoly explains about the on firm, duopoly market structure explains about 2 firms and
the oligopoly market structure explains about two or more firms of the market. There is no
prescribed number of the firms in oligopoly market structure, but the total number of firms
must be lower enough so that the activities and the operations of one firm could affect the
other firm.

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(Feng, Li and Li, 2014)
The difference of natural monopoly has been compared with the monopoly and the
oligopoly market structure. The difference table is as follows:
Basis for comparison Natural Monopoly Monopoly Oligopoly
Meaning Natural monopolies
could arise in the
industry because of
special raw material
requirement,
technology
advancement etc.
Monopoly
business are the
one where only a
single supplier is
existed in the
market and
supplying the
products and
services to the
customers.
Oligopoly is the
market structure
where few sellers and
traders are existed in
the market and sells
the different products
or substitute products
or the nearly
differential products.
Number of players One One Two to ten
Product differentiation Extreme Extreme None to substantial
(Jain, Panchal, and

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Kumar, 2014)
Competition Not exist Not exist Little competition
Prices Fair prices High prices Fair prices
Control over prices No Very considerable Some
Basis of setting price Industry decided
prices (Askar, 2013)
Depends on the
demand of the
product
Competitors prices
Restriction to entry Due to the special raw
material requirement,
technology
advancement etc.
Because of
economical, legal,
institutional or
any other reasons.
Because of economies
of scale.
On the basis of the study, it has been measured that the natural monopoly is bit
different from monopoly and the oligopoly in context with their nature and the
characteristics. The natural monopoly, normal monopoly and the oligopoly could be better
understand through different examples of the market which are currently existed. The main
example of natural monopoly is electricity, normal monopoly is transport at a particular place
and the oligopoly is cold drink, telecommunication etc. (Boldrin and Levine, 2008).
The study explains that the natural monopoly is tend by the government as the
competition in that particular industry would not work effectively and due to it, rather than
permitting an unregulated monopoly to enhance the price and lower the output, the
government decides to regulate the price or the production. This kind of monopoly is existed
due to high start up and fixed cost of starting the business in a particular industry. Natural
monopolies could arise in the industry because of special raw material requirement,
technology advancement etc. (Rodrigues, 2010) Since, these kind of businesses are
economically sensible thus the government allows such kind of business to exist but some
special regulations are implied on the business to ensure that the fair price could be levied on
customers.

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Conclusion:
On the basis of the study, it has been measured that the natural monopoly s quite
different from the monopoly and the oligopoly due to the government rules and regulations. It
has been measured that in the practical life, natural monopoly could be found in the
electricity, railway and the electricity. It has also been measured that the normal monopoly
could be found in the supermarket which is existed at a place where no supplier is there at
nearby. In addition, the oligopoly is existed in many industries such as telecommunication
industry, automobile industry, plastic industry and the soft drink industry. It briefs that the
natural monopoly is the special businesses which assists the country and the economy to
eliminate the wastage and the resources of the country.

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References:
Askar, S.S., 2013. On complex dynamics of monopoly market. Economic Modelling, 31,
pp.586-589.
Boldrin, M. and Levine, D.K., 2008. Against intellectual monopoly (Vol. 78). Cambridge:
Cambridge University Press.
Elberse, A., 2008. Should you invest in the long tail?. Harvard business review, 86(7/8),
p.88.
Feng, Y., Li, B. and Li, B., 2014. Price competition in an oligopoly market with multiple iaas
cloud providers. IEEE Transactions on Computers, 63(1), pp.59-73.
Jain, V., Panchal, G.B. and Kumar, S., 2014. Universal supplier selection via multi-
dimensional auction mechanisms for two-way competition in oligopoly market of supply
chain. Omega, 47, pp.127-137.
Mosca, M., 2008. On the origins of the concept of natural monopoly: Economies of scale and
competition. The European Journal of the History of Economic Thought, 15(2), pp.317-353.
Pepall, L., Richards, D. and Norman, G., 2008. Industrial organization. Contempory Theory
and Empirical Applications, 4, pp.358-401.
Rodrigues, R., 2010. Privacy on social networks: norms, markets and natural monopoly. The
Offensive Internet, pp.237-256.
Vikharev, S., 2013. Mathematical modeling of development and reconciling cooperation
programs between natural monopoly and regional authorities.
Vikharev, S., 2013. Verification of mathematical model of development cooperation
programs between natural monopoly and regional authorities.