Management Glossary

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natural monopoly
A market situation in which fixed costs are exceptionally high and variable costs are extremely low relative to those fixed costs. In this case, in absence of any regulations forcing competition, once one company dominates the market no other company can reasonably expect to compete in that market profitably. A typical example of a natural monopoly is wired telephone service. The cost of building the initial network of wires throughout a geographic area is extremely high, but, once the network is built, the cost of connecting one new subscriber to the network is relatively low. Thus, once a telephone company builds its network and captures most of the market it can amortize its fixed costs over a large number of customers. In this situation, unless a prospective competitor has exceptionally deep pockets, new companies would not be able to enter the market because, if they set their prices competitive with the incumbent companies, the revenue from their much smaller customer bases would be insufficient to cover their enormous financing costs. And if their prices are not competitive with the incumbent they will likely not win many, if any, customers. Governments can break up natural monopolies by forcing the incumbents to share their networks with competitors for a regulated fee. Of course, new technologies (such as cell phones) may also serve to disrupt former monopolies.
Contributed by: Managerwise Staff
See: fixed cost, variable cost

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