A natural monopoly is inevitable if the entry of a second firm shifts the demand curve facing each individual firm entirely below the average cost curve.

Question

Quizplus · Accepted Answer

This statement describes the condition for a natural monopoly to exist, which occurs when it is more efficient and cost-effective for one firm to produce the entire output for the industry. If a second firm enters and drives down prices, both firms will face lower demand and will have to price below their average cost in order to stay in the market, leading to losses and ultimately exit. Therefore, a natural monopolist can maintain its dominant position without fear of competition.

A Natural Monopoly Is Inevitable If the Entry of a Second