Decreasing Costs

Monopolies can come about because there are decreasing costs (increasing returns to scale) in the long run. In such a case, the long run average cost slopes downward, as shown in the picture:

Increasing Returns to Scale

In such a case, the largest producer can undersell the rest, and still make a bigger profit. Therefore, in an industry in which there are increasing returns to scale, we would not be surprised to find a monopoly, in the absence of any other causes. Such a case is called a "natural monopoly."

We will consider this case in some detail later in the chapter.