Taken together, this combination of patents, trademarks, copyrights, and trade secret law is called intellectual property , because it implies ownership over an idea, concept, or image, not a physical piece of property like a house or a car. Countries around the world have enacted laws to protect intellectual property, although the time periods and exact provisions of such laws vary across countries.
There are ongoing negotiations, both through the World Intellectual Property Organization WIPO and through international treaties, to bring greater harmony to the intellectual property laws of different countries to determine the extent to which patents and copyrights in one country will be respected in other countries.
Natural monopoly occurs where the economics of an industry naturally lead to a single firm dominating the industry. Economies of scale and sole ownership or control of a natural resource are two common examples of natural monopoly. A decreasing cost industry exhibits economies of scale, where the technology is such that the scale of operation matters, so that the long run average cost of production is lower for a large firm than for a small one.
Economies of scale can combine with the size of the market to limit competition. Figure 1 presents a long-run average cost curve for the airplane manufacturing industry. It shows economies of scale up to an output of 8, planes per year and a price of P 0 , then constant returns to scale from 8, to 20, planes per year, and diseconomies of scale at a quantity of production greater than 20, planes per year.
Now consider the market demand curve in the diagram, which intersects the long-run average cost LRAC curve at an output level of 6, planes per year and at a price P 1 , which is higher than P 0. In this situation, the market has room for only one producer. If a second firm attempts to enter the market at a smaller size, say by producing a quantity of 4, planes, then its average costs will be higher than the existing firm, and it will be unable to compete.
If the second firm attempts to enter the market at a larger size, like 8, planes per year, then it could produce at a lower average cost—but it could not sell all 8, planes that it produced because of insufficient demand in the market. Figure 1. Economies of Scale and Natural Monopoly. In this market, the demand curve intersects the long-run average cost LRAC curve at its downward-sloping part.
A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place.
Once the main water pipes are laid through a neighborhood, the marginal cost of providing water service to another home is fairly low.
Once electricity lines are installed through a neighborhood, the marginal cost of providing additional electrical service to one more home is very low. It would be costly and duplicative for a second water company to enter the market and invest in a whole second set of main water pipes, or for a second electricity company to enter the market and invest in a whole new set of electrical wires. These industries offer an example where, because of economies of scale, one producer can serve the entire market more efficiently than a number of smaller producers that would need to make duplicate physical capital investments.
A natural monopoly can also arise in smaller local markets for products that are difficult to transport. For example, cement production exhibits economies of scale, and the quantity of cement demanded in a local area may not be much larger than what a single plant can produce. Moreover, the costs of transporting cement over land are high, and so a cement plant in an area without access to water transportation may be a natural monopoly.
Another type of natural monopoly occurs when a company has sole ownership or majority control of a scarce physical resource for which there are no close substitutes.
In the U. Back in the s, when ALCOA controlled most of the bauxite, other firms were simply unable to produce enough aluminum to compete. As another example, the majority of global diamond production is controlled by DeBeers, a multi-national company that has mining and production operations in South Africa, Botswana, Namibia, and Canada. It also has exploration activities on four continents, while directing a worldwide distribution network of rough diamonds.
In this case, the natural monopoly of the single large producer is also the most economically efficient way to produce the good in question. This kind of natural monopoly is not due to large-scale fixed assets or investment, but, can be the result of the simple first-mover advantage, increasing returns to centralizing information and decision making, or network effects. Natural monopolies are allowed when a single company can supply a product or service at a lower cost than any potential competitor, and at a volume that can service an entire market.
Since natural monopolies use an industry's limited resources efficiently to offer the lowest unit price to consumers, it is advantageous in many situations to have a natural monopoly. For example, the utility industry is a natural monopoly. The utility monopolies provide water, sewer services, electricity transmission, and energy distribution such as retail natural gas transmission to cities and towns across the country.
The start-up costs associated with establishing utility plants and the distribution of their products are substantial. As a result, the capital cost is a strong deterrent for potential competitors. Also, society can benefit from having utilities as natural monopolies. Multiple utility companies wouldn't be feasible since there would need to be multiple distribution networks such as sewer lines, electricity poles, and water pipes for each competitor.
Since it's economically sensible to have utilities operate as natural monopolies, governments allow them to exist. However, the industry is heavily regulated to ensure that consumers get fair pricing and proper services. Another example of a natural monopoly is a railroad company. The railroad industry is government-sponsored, meaning their natural monopolies are allowed because it's more efficient and the public's best interest to help it flourish. Further, the industry can't support two or more major players given the unique resources needed, such as land for railroad tracks, train stations, and their high-cost structures.
However, just because a company operates as a natural monopoly does not explicitly mean it is the only company in the industry. The company might have a monopoly in one region of the country. Cable companies, for example, are often regionally-based, although there has been consolidation in the industry creating national players. More modern examples of natural monopolies include social media platforms, search engines, and online retailing. Companies such as Facebook, Google, and Amazon have built natural monopolies for various online services due in large part to first-mover advantages, network effects, and natural economies of scale involved with handling large quantities of data and information.
Unlike traditional utilities, these types of natural monopolies so far have gone virtually unregulated in most countries. A natural monopoly usually exists when it's efficient to have only one company or service provider in an industry or geographic location. Companies that have a natural monopoly may sometimes exploit the benefits by restricting the supply of a good, inflating prices, or by exerting their power in damaging ways other than though prices.
For example, a utility company might attempt to increase electricity rates to accumulate excessive profits for owners or executives. Or an internet service platform might use its monopoly power over information, online interactions, and commerce to exercise undue influence over what people can see, say, or sell online. Regulations over natural monopolies are often established to protect the public from any misuse by natural monopolies. Under the common law, many natural monopolies operate as common carriers, whose business is recognized as having risks of monopoly abuse but allowed to do business as long as they serve the public interest.
Common carriers are typically required to allow open access to their services without restricting supply or discriminating among customers and in return are allowed to operate as monopolies and given protection from liability for potential misuse by customers.
In most cases of government-allowed natural monopolies, there are regulatory agencies in each region to serve as a watch-dog for the public. If they start charging higher prices, it makes alternatives cheaper. For example, the business that controls the supply of oil may increase prices. This in turn opens the door for alternative solutions, such as solar panels, Microhydropower, Geothermal, or Residential Wind Power.
Yet by government controlling these forces, it deprives the alternatives from becoming economically viable. Natural monopolies exist primarily because economies of scale , which are so crucial.
In other words, the firm needs to be able to serve all of the market in order for it to remain financially viable. By doing so, it is able to gain from economies of scale and reduce the average unit price. This is predominantly an issue in markets whereby there are high fixed costs. For example, energy grids have extraordinary setup costs, with additional costs to maintain the system. Once these are set up, the cost to serve another customer is relatively low — meaning the more customers it serves, the more income to receives to pay for those initial costs.
One of the most important aspects of a natural monopoly is that it is natural. But what does that mean? It simply means that through the free market , competitors are unable or unwilling to compete. In other words, there are no external forces such as government regulations or protections that prevent competition. Natural monopolies are naturally occurring in the fact that there are economical forces that prevent more than one company from entering the market.
These natural elements mainly surround two factors — large fixed costs, and long economies of scale. Both are naturally occurring in specific markets such as the energy grid, sewerage systems, and water supply. The firm needs to be able to serve the whole market in order to obtain economies of scale which would be necessary in order to develop demand for the good.
For instance, airlines need to serve a large population in order to justify the high fixed costs on the planes it purchases. A natural monopoly has extraordinarily large fixed costs.
For instance, sewerage systems have significant initial fixed costs, but also require regular maintenance. That means the two firms need to now recoup double the investment to make it economically viable. To explain, even if the company sells to everyone in the market, it only just covers its fixed costs. That is to say that those fixed costs are so large that without the whole market, it would go out of business.
Natural Monopolies are characterized by high fixed costs, but low, if any, marginal costs. That means it costs very little to serve one extra customer — meaning economies of scale are crucial to such firms. If we look at airlines, for instance, there are cases whereby only one airline can service a specific route.
This might be because it is remote or there is low demand for that destination. To operate that route, the airline has high fixed costs in terms of the plane, maintenance, and staff. However, the cost to fly one customer versus is virtually zero. So the more people the airline has on the plane, the more economically viable that route is. Economies of scale is a crucial aspect of a natural monopoly.
This is because only one firm can truly benefit from economies of scale in a market that is a natural monopoly. Essentially, long-run average costs continue to fall until the vast majority of the market is serviced. So economies of scale are not fully achieved until demand is met.
At the same time, there is only demand for the product when the product is produced and sold at a lower value. In a natural monopoly, the point by which a company benefits from economies of scale is close to the whole demand in the market. That means that before this point, economic production is inefficient because the average cost of producing the good or service is higher than it would be otherwise.
To explain, let us take an example.
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