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Natural monopoly

In economics, a natural monopoly is a good where the average cost curve is decreasing when it intersects with the demand curve[?]. In standard supply and demand theory with a perfect competition this creates an equilibrium price[?] that is below the average cost to produce.

This may create a situation where a single company becomes the only supplier of a product or service because the nature of that product or service makes a single supplier more efficient than competing ones. In particular, companies that grow to take advantage of economies of scale often run into problems of bureaucracy; these factors interact to produce an "ideal" size for a company, at which the company's average cost of production is minimised. If that ideal size is large enough to supply the whole market, then that market is a natural monopoly.

Some also use the term for suppliers in a market for which entry into the market is extremely expensive. For example, early railroad and telephone companies rarely had to worry about competitors because they would have to duplicate large amounts of track or wiring that the earlier company had already paid for. In this case, the monopolies can be eliminated either by new technologies like the automobile and wireless communications, or by government intervention.

Public utilities are generally viewed as natural monopolies.

Some argue that software is a natural monopoly, due to the low cost of replication and network effects of compatibility with the dominant software system. This argument has been used to justify arguments relating both to Microsoft's current personal computer software market domination, and to suggest the possibility of its replacement by a future natural monopoly of free software.

See also: market forms currency standardization

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