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28. Natural monopoly as a state of the market
A number of industries, such as the electric power industry, the gas industry, transport, and some others, are characterized by a high degree of monopolization of production and sales, as well as difficulties in providing consumers with the freedom to choose suppliers of various goods and services. These sectors of the economy have inherent features that allow individual economic entities to monopolize the markets. The freedom of consumers of their products is limited organizationally and technologically (by the existing configuration and bandwidth of the network, the relationship between production and consumption processes) and economically (economies of scale in production with an increase in its capacity). Goods produced by subjects of natural monopoly have no replacement, and therefore the demand for them depends to a lesser extent on changes in the price of this product than the demand for other types of goods.
The following main features of natural monopolies are distinguished:
▪ the activities of natural monopolies are more efficient in the absence of competition, which is associated with significant economies of scale and high semi-fixed costs;
▪ high barriers to entry into the market, since the fixed costs associated with the construction of such structures as roads, communication lines are so high that the organization of a similar parallel system performing the same functions is difficult to pay off;
▪ low elasticity of demand, since the demand for products or services produced by natural monopoly entities is less dependent on price changes than the demand for other types of products (services), since they cannot be replaced by other goods;
▪ the network nature of the market organization, i.e. the presence of an integral system of spatially extended networks through which a certain service is provided, including the presence of an organized network that requires dispatching from a single center in real time.
Industries related to natural monopolies are distinguished by the fact that competitive mechanisms do not operate in them or are practically not developed. The balance of interests of producers and consumers cannot be established by the "invisible hand of the market" in the process of competition between various producers for the right to satisfy consumer demand. Therefore, state intervention is required. The most important conditions for maintaining such a balance are the availability of goods for consumers at affordable prices, and for subjects of natural monopolies - their effective functioning and development.
Author: Ilyina V.N.
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