The most important result to be developed in this chapter can easily be stated: In a world in which competition is ideal, in a way to be described later, there is natural monopoly in a particular market if and only if a single firm can produce the desired output at lower cost than any combination of two or more firms. Natural monopoly is defined in terms of a single firm's efficiency relative to the efficiency of other combinations of firms in the industry. It is possible to test the proposition that a given firm is a natural monopoly.

Not all monopolies are natural. For example, monopoly may result from the control by a single firm of essential inputs into production, through trademarks or patents, or from the exclusive right to sell in a certain market. The essential characteristic of this form is that monopoly power is based on the inability of other firms to compete on an equal basis. Monopolies of this sort are generally transitory in nature and may also serve a useful social function, for example, when the granting of a patent gives an incentive for technological innovation. This form of monopoly, however, is not a natural monopoly.

Monopoly power may also result from unfair practices, such as predatory pricing, by one firm against its competitors, or from the formation of a cartel of several firms in a market.