Tip:
Highlight text to annotate it
X
So, we have been painting monopolies in a bad light, right? But not all
monopolies want to be monopolies. There is an interesting case of a
natural monopoly. Now, there are some firms that have very, very, very
large minimum efficient scales. So, if the monopoly experiences substantial
economies of scale only at a very large scale, the industry may not be
able to support more than one producer. Let’s take a look at a diagram
here. Let’s say that the industry faces a demand curve or the AR curve
to a monopoly as AR1 demand 1 and then we draw LRAC. The monopolies can
gain supernormal profit at any output between Q0 and Q1. Now, if there
were two firms however instead of one file, each charging the same price
and supplying half the industry output, they will each have a demand
curve of Demand 2 AR2. In this case, each of them will not be able to make
a normal profit at any quantity, the LRAC lies above them all the time.
There is no price that will allow them to help cover costs. This case is
known as the natural monopoly. So, it is particularly likely if the market
is small, for example, when you need a very, very large company to build
substantial economies of scale. For example, electricity transmission
grids in cities are usually operated by only one country because there
is no need to have two sets of electricity grids leading to a house and
asking to choose one. That is wasteful duplication and both firms will
actually make losses.