Essay On Natural Monopolies

Despite the overwhelming benefits of having competition policies, as mentioned above, there are still some who argue that at the end competition may not yield the best outcome for society.

The first argument relates to the economic scale and the phenomenon of ‘natural monopolies’ . Professor Whish explains that “in some markets there may be significant economies of scale, meaning that the average cost per unit of output decreases with the increase in the scale of the outputs produced; economies of scope occur where it is cheaper to produce two products together than to produce them separately” .It is possible that in some markets profit can be made only by a firm supplying at least one quarter or one third of the total output. Similarly a natural monopoly maybe formed as in specific market the minimum efficient scale of operation may achieved only by one firm having 50% of market shares. Natural monopolies are formed when the scale economies are so great that having two or more competitors in the same market makes it not viable and inefficient. Where a natural monopoly exists it is inappropriate to attempt to

Competition delivers better outcomes than monopolistic ones and even in the cases where the competition policy provides some monopolistic rights at the same time it provides safeguards to ensure that those rights will not be used abusively. The UK Government it its White Paper Productivity and Enterprise: A world Class Competition Regime stated that “Vigorous competition between firms is the lifeblood of strong and effective markets. Competition helps consumers get a good deal. It encourages firms to innovate by reducing slack, putting downward pressure on costs and providing incentives for the efficient organization of production”