A natural monopoly occurs when the industry’s demand conditions
allow no more than one firm to cover its costs while producing at its
minimum efficient scale. Electrical power transmission is a natural
monopoly—with current technology it is cheaper to have only one set of
power lines (rather than two or more) serving a given region.
A second type of natural entry barrier is limited access to key natural
resources. For example, in order to produce diamonds or gold or copper,
it is necessary to possess a mine that is rich enough in its deposits and
large enough in scale that the production costs are reasonably close to
those of existing mining firms. Such deposits are only found after
hundreds of millions of dollars are spent on risky exploration; and even
then there is considerable luck involved in the discovery of the mine. The
result is that entry by new firms is difficult and incumbent firms often
possess market power for extended periods of time.
A third type of entry barrier comes from what are called network effects
For some products, the benefits accruing to any individual consumer
depend importantly on the existence of a large network of other
consumers. The benefits you receive from using Twitter, for example,
obviously depend on the number of other users. Once Twitter has
established a large network of users, it is very difficult for other
businesses to “break in” to this industry by offering a competing product.
See Applying Economic Concepts 10-1 for a discussion of how network
effects in Facebook, eBay, and Microsoft Word represent formidable entry
barriers in these industries.