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A 10 pages term paper on Natural Monopoly

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Natural Monopoly

          In a monopoly one or more persons or companies totally dominates an economic market. Monopolies may exist in a particular industry if a company controls a major natural resource, produces (even at a reasonable price) all the output of a product or service because of technological superiority (called a natural monopoly), holds a patent on a product or process of production, or is granted government permission to be the sole producer of a product or service in a given area.

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          Natural monopoly has been defined as "a market situation in which the average costs of production continually decline with increased output. Therefore, average costs of production will be lowest when a single firm produces the entire output demanded." This in turn relates to the fact that when national monopoly exists, a competitive market structure will be costly and difficult to maintain.

          The kind of policies that the government can employ to regulate this from happening is: monopolist could be permitted to operate freely; government regulations can be imposed on the monopolists; and the government could completely take over the production in the industry. In this modern world, the best alternative for the government would be to set up regulatory bodies and laws. The issues can be divided into: a) regulation of networks and b) regulation of services or content. A key overarching issue is whether a strict regulatory separation between the ownership and operation of networks and the ownership and operation of services over those networks should be enforced.

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          The developed countries' law generally views monopolies as harmful because they obstruct the channels of free competition that determine the price and quality of products and services offered to the public. The owners of a monopoly have the power, as a group, to set prices, exclude competitors, and control the market in the relevant geographic area. United States and United Kingdom's antitrust laws prohibit monopolies and any other practices that unduly restrain competitive trade. These laws are based on the belief that equality of opportunity in the marketplace and the free interactions of competitive forces result in the best allocation of the economic resources of the nation. Moreover, it is assumed that competition enhances material progress in production and technology while preserving democratic, political, and social institutions.

          Telecommunications is the fastest growing services sector in the world. Everyone wants access to its services and networks, businesses and governments rely on it Capital costs are enormous and the pace of technological changes breathtaking.

          In telecommunications the provision and operation of the physical infrastructure, the network, and access to that network was regulated. This regulation was based largely on economic criteria. Mainly based upon natural monopoly and network externality arguments, access to and use of the network were regulated on the basis of:

  1. Common carriage, that is universal access rights;
  2. Non-discriminatory tarriffing (to prevent cream-skimming, cherry picking etc).
  3. Inter-connection
  4. Price and or profit control.

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          Except in the US, since the network was a public sector monopoly, control of prices and returns were a directly political matter. The message content was a private transaction between individual subscribers and was unregulated. The UK progressed towards full liberalization and now faces major competition in the business services market from other operators and in the domestic and value added services markets from numerous cable and mobile service providers as well as service resellers ("callback").

          Telecommunications operators are now becoming much more selective in their investment choices. They are increasingly looking at investments, which provide more obvious synergies with their existing operations, and/or with the new markets in which they are considering an investment.

          In Europe the principle of universal service was not even expressed and both the growth in penetration and tariffs were governed in general, with the special consideration of governments' revenue requirements. In so far as telecommunications was a public service it gave citizens no right to telephone service and merely protected the PTT against civil action by its users.

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          In recent years, Europe had to defend monopoly in the telecommunication industry, which has been accomplished by erecting universal service into a key principle of telecommunications regulation. It has been based on the assumptions that the policies of the incumbent monopolies would be governed by principles of universal service even where penetration levels are relatively low, waiting lists long and tariffs high. It is then argued that this service is only sustainable because of a cross subsidy structure that competition, with its accompanying cream skimming and cherry picking, would make unsustainable. It then follows that, if competition is to be introduced, the incumbent dominant operator's universal service obligations, which usually amount to no more than the right of subscribers to receive service on demand at a 'reasonable' economic cost and at published non-discriminatory tariffs, will incur losses that must be shared, if the playing field is to be level, by all competitors through an access charge system. Detailed studies conducted in the UK have shown that these so called losses are possibly entirely and certainly very largely, non-existent, and can and have been easily absorbed within the cost of the dominant operator without actually damaging its competitive position in the market.

          These regulations have several benefits. Firstly, access to such services is now so essential to full economic and social participation in society that it is regarded as a basic requirement of citizenship and thus supplied universally at a reasonable cost. Secondly, this advanced provision of network access will provide the necessary infrastructural base for the accelerated development of the information service sector, or more generally that such access will make a national economy more productive and competitive than competitor economies, which do not provide such access. Thus resulting in accelerated development of the network beyond that which the operators would themselves make according to normal network investment criteria and in response to expected demand.

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          The question that arises in ones mind is if the telecommunications industry is no longer a natural monopoly should its regulations be abolished? Regulation or policy intervention can be either negative - imposing obligations on service providers - or positive - the public provision of services.

Negative Implications

          These regulatory bodies do try to impose rules and laws but only if the legal process is quick. As such it is clearly impossible, and undesirable, to police, for regulatory purposes, as the Internet is already demonstrating that the total flow of bits over digital networks between the providers and consumers of information services. On another level, it would be politically naive, as both the current fuss about pornography and racial incitement on the Internet and the introduction of the home censorship chip for TV in the US demonstrate, to believe that complete libertarianism will be the rule, whatever barriers to investment this may raise.

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          Publicness can be any service intended for general reception, whether encrypted or not, whether addressed or not. It can be any type of service, which was available, on whatever terms, to anyone who wished to access it and which was made available in the same form to more than one person. This can create difficult borderline cases for the courts or regulatory authorities to deal with between public services and genuine closed user group services. Secondly it can relate to the extent of this publicness and would be based either on the fact the number of consumers within a given market or on market share. In this case, the regulatory bodies have to define the specific markets to be used, the scale thresholds and measures to be used and the appropriate content regulations to be applied.

          The manifestation of market power is changing from a national monopoly situation, but that is not the case on the global competition level. The new scenario is that there are a few dominant players in the local market providing quality services but only a few international giants /conglomerates, with many of the national players as partners or participants. This special form of internationalization is a strong tendency in the industry and on the markets. It has become increasingly dependant on the national based regulation body to regulate as well as eliminate many aspects of market failure.

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Positive Implications

          While a universal service policy may provide universal public access to services over converged digital networks, but it is not part of their responsibilities to see that adequate or optimal range of services is actually available to the public. As such the responsibility of the regulatory body that is the universal service's policy for classic telecommunication services, moreover, it does not provide network access it provides the content of the service that is dial tone. It can be easily adapted to provide other aspects of the services such as itemized billing, call forward, caller line identification etc.

          The nature of the desired regulatory structure and the speed with which it needs to be achieved depend on one's judgment on the sustainability of network competition and on the extent of the need to divert user spending on services for network investment. As such it is totally a different scenario with the information content services. The situation in this industry is clearly very different. Other steps need to be taken to ensure that the services available are of sufficient range and quality to meet specific needs and demands of the consumers.

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          If the natural monopoly regulations are abolished then politically any democracy cannot ensure its citizens that they have access to the fullest possible range of relevant information and debate and that the relationship between public media and the process of politics is such as to ensure a fair and open competition for votes. Thus an unregulated information market can be guaranteed, to say the least, to provide these conditions to a certain extent.


Gwartney, James D. and Richard L. Stroup. (1992) Economics Private and Public Choice. Philadelphia: The Dryden Press Mconnell, Campbell R. (1996) Economics. New Jersery: McGraw Hill Inc.

Parkin, Micheal. (1993) Economics. New York: Addison-Wesley Publishing Company.

Solnik, Bruno. (1991) International Investments. California: Addision-Wesley Publishing Company.


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