Natural monopoly

• Natural monopolies are a sub-genre of monopoly theory that investigate and analyze real-life examples such as utilities, rail track providers, and internet distribution.
• Natural monopoly markets are characterized by huge fixed costs, especially startup costs, and the potential for economies of scale.
• It makes rational sense for only one firm to supply the entire market in a natural monopoly market, as competition would result in a wasteful duplication of resources.
• The first firm into the market, the first mover, has the economies of scale advantage, and any other firm entering later will not have the same economies of scale advantage.
• A natural monopoly market dominated by a single firm would result in allocated efficiency and productive efficiency, as long as the firm is regulated.
• A profit Maximizer firm will produce where marginal revenue is equal to marginal cost.
• Supernormal profit is the difference between average revenue and average cost, and it is greater than zero.
• The outcomes of a natural monopoly are similar to those of a normal monopoly, but with downward sloping cost curves due to economies of scale.
• The rationale for regulation is to bring prices and quantities to allocated efficiency, which is the point where price equals marginal cost.
• The natural monopolist argues that it is not profitable to produce at allocated efficiency levels.
• The conclusions of the natural monopoly model are that if there is one firm dominating, as long as it is regulated, we would get allocated efficiency and productive efficiency benefits.
• Competition in a natural monopoly market results in allocated inefficiency and productive inefficiency.
• High capital costs are a significant barrier to entry to competition and only room for one firm to be efficient as the MES is so large