# Natural Monopoly: Definition, How It Works, Types, and Examples

![Natural Monopoly: A monopoly that occurs through natural conditions in a free market.](https://www.investopedia.com/thmb/MMq-Hg3Ntf_YFDI-3H29UwP8HF4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/natural_monopoly.asp-FINAL-6752adca612b4c648c1447518584dcd7.png)

*— Investopedia / Joules Garcia*

> **Definition**
>
> A natural monopoly occurs when a single company can produce a good or service at a lower cost than its competitors, which results in low competition in the market.

## What Is a Natural Monopoly?

A natural monopoly occurs when one company can efficiently serve the market at a lower cost compared to its competitors. As such, the industry or sector comes with high barriers to entry and [startup costs](https://www.investopedia.com/terms/s/startup-capital.asp) for new players. As such, a natural [monopoly](https://www.investopedia.com/terms/m/monopoly.asp) has only one efficient player. Natural monopolies can arise in industries that require unique raw materials, technology, or similar factors to operate.  

### Key Takeaways

*   A natural monopoly involves a single player that serves the market efficiently at a lower cost.
*   This monopoly has high start-up costs and significant economies of scale.
*   Natural monopolies may be permitted but are often heavily regulated to protect consumers.

## Understanding Natural Monopolies

A natural monopoly becomes a monopoly over time due to market conditions and without any unfair business practices that might stifle competition. It generally happens when there are high startup costs or powerful [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp) that come with conducting a business in a specific industry like telecommunications or [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp). These barriers can prevent potential competitors from entering the market.

Two main factors can lead to this type of monopoly:

1.  When a company takes advantage of an industry's high [barriers to entry](https://www.investopedia.com/terms/b/barrierstoentry.asp) to create a moat or protective wall around its business operations. The high barriers are often due to the significant amount of capital or cash needed to purchase [fixed assets](https://www.investopedia.com/terms/f/fixedasset.asp), which are physical assets a company needs to operate.
2.  When producing at a large scale is so much more efficient than small-scale production, that a single large producer is sufficient to satisfy all available market demands. Because their costs are higher, small-scale producers can simply never compete with the larger, lower-cost producers.

The natural monopoly of a single large producer is also the most [economically efficient](https://www.investopedia.com/terms/e/economic_efficiency.asp) way to produce a good or service in question. This is not due to large-scale fixed assets or investments but the result of the simple [first-mover](https://www.investopedia.com/terms/f/firstmover.asp) advantage, increasing returns to centralizing information and decision-making or [network effects](https://www.investopedia.com/terms/n/network-effect.asp).  Consider how redundant setting up a second electrical grid to power homes in a community when one is already set up.

> **Important**
>
> Some monopolies use tactics to gain an unfair advantage by using collusion, mergers, acquisitions, and hostile takeovers. Collusion might involve two rival competitors conspiring together to gain unfair market advantage through coordinated price-fixing or increases.

## Special Considerations

Regulatory agencies in each region serve as a watchdog for the public when it comes to government-approved natural monopolies. Utilities are typically regulated by state-run departments of public utilities or public commissions.

The U.S. Department of Transportation has broad responsibilities for the safety of travel for railroads while the U.S. Department of Energy is responsible for the oil and natural gas industries.

Keep in mind, though, that no equivalent agencies in the U.S. have been empowered to similarly regulate tech and information monopolies, nor are they governed as common carriers, though this may be a trend in the future.  

> **Fast Fact**
>
> 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.

## Advantages and Disadvantages of Natural Monopolies

### Advantages

One of the benefits of natural monopolies comes from using an industry's limited resources efficiently to offer the lowest unit price to consumers. They can serve a good purpose when a single company can supply a product or service at a lower cost than anyone else, and at a volume that can service an entire market.  

Natural monopolies have certain benefits. For instance, multiple utility companies wouldn't be feasible since there would need to be many [distribution networks](https://www.investopedia.com/terms/d/distribution-network.asp) like 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. But, the industry is heavily regulated to ensure that consumers get fair pricing and proper services.

### Disadvantages

One of the main drawbacks is that it cuts out the competition and takes away choice from consumers. This means that customers can only get certain goods and services from one provider.  

Having a natural monopoly in place bars other potential players from entering the market. This is due to the high startup costs associated with doing business.

Because there is only one player in the market, regulation may be an issue—especially when it comes to monopolies that aren't approved or run by the government. As such, entities may abuse their power, increase prices, and provide poor customer service.  

Pros

*   Lower costs goods and services than rivals
    
*   Economically sensible
    
*   Fair pricing and proper services
    

Cons

*   No competition
    
*   High startup costs and barriers to entry
    
*   Abuse of power and poor customer service
    

## Examples of Natural Monopolies

Companies with a natural monopoly may sometimes exploit the benefits by restricting the [supply](https://www.investopedia.com/terms/s/supply.asp) of a product or service, [inflating prices](https://www.investopedia.com/terms/p/price_inflation.asp), or exerting their power in damaging ways other than through prices.

Under [common law](https://www.investopedia.com/terms/c/common-law.asp), 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.

The following are some industries that have natural monopolies:

*   **Utility industry:** This is a natural monopoly. 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 startup costs associated with establishing utility plants and the distribution of their products are substantial. As a result, the [capital cost](https://www.investopedia.com/terms/c/costofcapital.asp) is a strong deterrent for potential competitors.
*   **Internet providers:** A 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.
*   **Telephone companies:** Companies that provide landline services are required to offer households within their territory phone service without discriminating based on the manner or content of a person’s phone conversations and are in return generally not held liable if their customers abuse the service by making prank phone calls.   
    
*   **Railroads:** The railroad industry is government-sponsored, meaning their natural monopolies are allowed because it's more efficient and in 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.

Modern examples of natural monopolies include [social media](https://www.investopedia.com/terms/s/social-media.asp) platforms, search engines, and online retailing. Companies such as Meta, 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.

## How Will I Use This in Real Life

Natural monopolies can provide you with essential services like electricity, water, sewage services, public transportation, and other public services. This means they limit the amount of choice you have for these services because it doesn't make sense to have more than one provider offer these services. Service providers benefit from lower costs while providing you with reliable services.

## How Do Natural Monopolies Work?

A natural monopoly is a monopoly where there is only one provider of a good or service in a certain industry. It occurs when one company or organization controls the market for a particular offering. This type of monopoly prevents potential rivals from entering the market due to the high cost of starting up and other barriers.

## How Is a Natural Monopoly Different From a Regular Monopoly?

As the name implies, a natural monopoly exists naturally. Market forces allow one player in the market to become the only player in a certain industry without stifling the competition. Regular monopolies, on the other hand, are created when a company controls the market by eliminating the competition. This happens when a key player buys up the [supply chain](https://www.investopedia.com/terms/s/supplychain.asp) and buys its rivals. Monopolies may lead to the removal of substitute products and services, higher prices, and low-quality products.

## What Are Some of the Most Common Types of Natural Monopolies?

The most common types of natural monopolies include those found in the [telecommunications](https://www.investopedia.com/ask/answers/070815/what-telecommunications-sector.asp) center, the utility industry, oil and gas companies, and the railroad industry.  

## The Bottom Line

Monopolies can be a boon and a blessing to consumers and the market. Unlike regular monopolies, natural ones occur because market forces shape the industry to the point where there is only one key player that offers a specific good or service to the public. Even though this type of monopoly is allowed to exist, the barriers for potential rivals to enter the market can be high. Some of the most common examples of natural monopolies include utilities and railroads.

> **Article Sources**
>
> 1.  FERC. "[What FERC Does](https://www.ferc.gov/about/what-ferc/what-ferc-does)."
>     
> 2.  United States Environmental Protection Agency. "[Regulatory and Guidance Information by Topic](https://www.epa.gov/regulatory-information-topic)."
>     
> 3.  Office of the Law Revision Counsel. "[47 USC 202: Discriminations and Preferences](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title47-section202&num=0&edition=prelim)."