natural monopoly

A natural monopoly exists when there is great scope for economies of scale to be exploited over a very large range of output. Indeed the scale of production that achieves productive efficiency may be a high percentage of the total market demand for the product in the industry.

Natural monopolies tend to be associated with industries where there is a high ratio of fixed to variable costs. For example, the fixed costs of establishing a national distribution network for a product might be enormous, but the marginal (variable) cost of supplying extra units of output may be very small. In this case, the average total cost will continue to decline as the scale of production increase, because fixed (or overhead) costs are being spread over higher and higher levels of output

The telecommunications industry has in the past been considered to be a natural monopoly. Like railways and water provision, the existence of several companies supplying the same area would result in an inefficient multiplication of cables, transformers, pipelines etc. However the perception of what constitutes a natural monopoly is now changing - in part because of the impact of new technology in reducing traditional barriers to entry within markets.

In the case of the telecommunications industry in the UK, British Telecom has faced increasing levels of competition from new telecommunications service providers during the 1990s - not least the rapid expansion of mobile and cable services. This has led to a change in the role of the industry regulator (OFTEL). Its main role now is not necessarily the introduction of even more competition into the telecommunications industry - but a policing role to ensure fair competition between service providers.

In the United States, the debate continues to rage over whether Microsoft can be considered a natural monopoly!