![]() In 2014, Silicon Valley venture capitalist Peter Thiel famously proclaimed that “competition is for losers” in an essay published in the Wall Street Journal and in his book (also published in 2014) Zero to One. In the absence of any intervention of the government, natural monopoly could be highly inefficient as apparent from the graph shown as follows (Mankiw & Taylor, 2011).Media scholar Jonathan Taplin, author of the new book Move Fast and Break Things, on the rent-seeking and regulatory capture of digital platforms. Efficiency Considerations The economic resources have scarce availability and hence it is critical that efficient allocation of these must be done in order to ensure that societal objectives are met. Also, in industries where economies of scale is high, the monopolist firm can enhance production in order to ward off any competition as increasing the output would tend to lower the unit cost and enhance the competitive advantage of the existing player ( Besanko & Braeutigam, 2010). This tends to have an adverse impact on the public welfare. As a result, the output in a natural monopoly is lower than the output level at which efficiency would be achieved. However, at this production level the price charged from the buyers would be lower and therefore the overall profitability of the firm would decline (Mankiw & Taylor, 2011). Therefore from a economic efficiency point of view, it would make sense for the firm to increase the output to a point when the average cost curve tends to attain the lowest value. ![]() ![]() A noticeable attribute of the firm operating in the natural monopoly setting is the fact at equilibrium, the average cost does not attain the lowest value. NAME: STUDENT ID: The above graph clearly highlights the equilibrium quantity and price charged as Q m and P m respectively. This is apparent from the following graphs (Mankiw, 2014). In order to fulfil this, the monopolistic firm causes artificial shortage or scarcity by producing a output level that is lower than the highest possible efficient (Krugman & Wells, 2008). For price maximization, the production of the firm would be carried to the extent that marginal cost (MC) is lesser than price (P). This would be apparent in their economic decisions i.e. Equilibrium Determination In the absence of any competition and enjoying complete market share, it is normal to expect that in a natural monopoly setting, the concerned firm would be driven by the aim of profit maximisation. Clearly, it lacks economic reason to bring about infrastructure duplication on such a huge scale and hence government barriers are erected (Mankiw, 2014). This is witnessed often in those sectors which have a high setup costs related to enabling infrastructure which is witnessed in avenues such as transmission of electricity and other utilities. At times, natural monopoly exists because of government policies. Due to the limited availability of the resource, the firm that tends to have control over these ensures that the others firm are not able to enter the market as the enabling infrastructure are single handed controlled. Yet another reason giving rise to the incidence of natural monopoly tends to be the control on certain resources that may be scarce (Nicholson & Snyder, 2011). Theoretically, this player on account of 100% market share should have the lowest production cost which tends to be beneficial in comparison to existence of multiple players. The key contributing factor is the reaping of economies of scale which tends to lower the average production cost and provides an entry barrier thus justifying the presence of a single firm only. ![]() Natural monopoly may arise due to a host of reasons. This situation typically arises on account of the sizable advantage in terms of cost which the current player present in the market enjoys that renders the entry of other players in the market difficult ( Samuelson & Marks, 2003). NAME: STUDENT ID: Introduction A peculiar circumstance when instead of multiple firms, a particular firm tends to fulfil the market needs in a superior manner is referred to as natural monopoly.
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