Coercive and Natural Monopolies

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.