Natural Monopolies Cannot Exist

Updated: Apr 22

They can exist only temporarily.

Reason: the law of diminishing marginal returns

The law suggests that there comes a time when a marginal increase in a given factor of production does not yield as much increase in productivity as it used to. In simple words, there comes a time when adding a worker or another unit of capital does not increase productivity as much as it used to. It does not mean that productivity declines. It only means the marginal increase in productivity declines.

In the real world, most people dismiss theories, so we see corporations and governments getting bigger and bigger. As they get bigger, they have to invest resources in non-operational activities, things that have nothing to do with value creation. This leads to inefficiency. The right thing to do at this point is disinvestment. If they don't do it, they are bound to fall under their own weight. When a company wants to monopolize, it would either buy out its competitors or lock them out. In both cases, its size would eventually become its peril. A bunch of small companies would eventually come up with a substitute. The industry that the monopoly took over would become obsolete. This is how I see things working out in a free and open market. Antitrust laws may end up protecting big companies from getting bigger and dying, which is why I found antitrust laws to be antithetical to the ideals of the free market.

In defence of antitrust laws, it can be suggested that they protect small businesses from getting bullied. In theory, it sounds cute. In reality, I am afraid most small businesses don't have the resources and the guts to go against a big company in court. Bi