Coercive and Natural Monopolies

Competition is one of the key elements of a healthy economy, and in all major economies of the world authoritative bodies are in place to enforce competition and antitrust laws to prevent monopolies from dominating the market. However, not all monopolies are formed with the intent of deliberately squeezing out the competition. Some monopolies result from a situation where the first supplier in a newly created market, in other words the innovator of either a product or service, becomes firmly entrenched to the extent that potential competitors find it difficult, if not impossible, to break into the market. This type of monopoly is referred to as a ‘natural’ monopoly and the obstacles faced by potential competitors may be referred to as ‘barriers to entry’. Examples of natural monopoly would include providers of public utilities such as water services, electricity and landline telecommunications in countries where these are supplied by private companies, or under government contract. Setting up these services requires substantial capital outlay, which is difficult to match.

Natural monopolies can also occur when the supplier of a product has a vast price advantage, due to being first on the market, cost-effective distribution, raw material supplier agreements, and other factors. In this case competitors may enter the market, but never develop to the extent of being a serious threat. A natural monopoly may require intervention by authorities if called upon to do so by potential competitors who are battling against barriers to entry, or by consumer protection groups who believe the monopolist to be abusing their position to the detriment of consumers.

This latter scenario, where barriers to entry make it impossible for competitors to break into a market, may be deemed to be a ‘coercive’ monopoly situation. So a coercive monopoly is not so much that the company is the sole supplier of product or services, with no competitors desirous of entering the market, but is an active strategy to prevent potential competitors from getting a foothold in a particular market. The coercive monopolist is then in what is sometimes termed as a ‘non-contestable market’, where decisions can be made regarding pricing and supply without consideration having to be given to competitor activity. Free market advocates are generally of the opinion that a coercive monopoly can only come about with government assistance, even if that assistance takes the form on non-intervention. Free market advocates would consider utility services to be a coercive, rather than natural, monopoly because of government involvement, even if such services are provided by non-government companies.