More technology, less natural monopolies

A natural monopoly occurs when a single firm in a market provides a good or service more efficiently (at a lower cost) than would be possible with multiple firms competing. This usually occurs in industries with significant economies of scale, where fixed costs are high (infrastructure) and variable costs are relatively low. In this context, marginal costs (the cost of producing an additional unit) decrease as output and the number of customers increase, creating a virtuous cycle of gradually lower prices for consumers, attracting more customers, and increasing sales volume and revenue for the firm. Thus, it is more efficient for a single firm to operate, avoiding duplication of infrastructure. Economies of scale make operations more efficient, reducing the average cost per unit as output increases. Initially, marginal costs decrease, with the dilution of fixed costs across more customers, but after reaching the company's capacity limit, the marginal cost curve tends to increase, explained by the law of diminishing returns to scale, resulting in a "U” curve. (In the graph, hypothetical study of electricity supply to Gaia). (100 thousand families/houses, Crestuma dam capacity 117 MW, annual production 311 GWh).

Public services (utilities), that is, services essential to society, are the main examples of natural monopolies, such as the supply of water, electricity, natural gas, communications, highways and rail transport, requiring large initial investments in infrastructure. But are natural monopolies a reality or is it a myth? Technological advances challenge the existence of these natural monopolies. Wireless telecommunications have significantly reduced the upfront costs of fixed telecommunications (such as cables, masts and underground networks), but governments continue to impose [artificial] barriers to entry for new competitors, such as operator licenses. Governments should focus on regulating these industries in a balanced way, ensuring that monopolies do not harm consumers. The emergence of low-cost airlines has also dispelled the myth that airlines, in order to be viable and provide a true public service, necessarily have to be state-owned and controlled. In reality, low-cost airlines often provide a more efficient public service than traditional airlines. Technological advances and innovation thus allow competition to emerge in markets that were previously seen as natural monopolies. In addition to technological advances, changes in regulations can also challenge the need for natural monopolies in certain sectors.

Solar photovoltaic energy and other forms of decentralized electricity production allow consumers to generate part of their own energy, challenging the traditional centralized monopoly model. However, bureaucracy for individuals, the complexity of accessing the electricity grid to sell the surplus produced and the low price paid to small producers are barriers that end up discouraging decentralized energy production. This favors the centralized production model, where subsidies and incentives are directed to large companies in the installation of offshore wind farms or large photovoltaic plants. Interestingly, the cost of producing electricity in some of these large projects is significantly higher than the price of kWh sold to the public (€0.15) or MWh traded on electricity markets (around €50), such as the Iberian stock exchange OMIE. YouTube and streaming channels threaten the traditional television monopoly. Cryptocurrencies and blockchain threaten the traditional banking sector. E-commerce platforms like Amazon and Alibaba allow producers and merchants to sell directly to consumers.

Technological innovation is a powerful force in eliminating monopolies by creating viable alternatives, decentralizing production, reducing entry costs, and enabling new business models. As technologies evolve, industries previously considered "natural monopolies” can be challenged by innovations, leading to more competition, efficiency, and choices for consumers.

Paulo Monteiro Rosa
Senior Economist at Banco Carregosa