What happens in markets where there is a natural monopoly?

In markets characterized by a natural monopoly, a single firm typically dominates due to the high entry costs associated with establishing and operating in that market. These entry costs arise from the significant investment necessary to provide the infrastructure or product that the market demands, often making it economically unfeasible for multiple firms to compete effectively.

For instance, industries such as utilities (water, electricity, and gas) often require substantial capital expenditure to build and maintain the necessary infrastructure. As a result, the established firm can leverage economies of scale, reducing average costs as production increases, which allows it to offer lower prices than multiple small firms could collectively provide.

This dominance makes it difficult for new firms to enter and compete, as they would need to invest heavily without guaranteeing sufficient market share to cover their costs. Consequently, a natural monopoly can lead to a scenario where one firm serves the entire market, facilitating consistent service but potentially leading to issues such as price manipulation and reduced service quality without regulatory oversight.