Final answer:
A natural monopoly exists in a market where one firm can serve the entire market more efficiently than multiple firms due to substantial economies of scale, especially prevalent in industries with high infrastructure costs such as utilities. A monopoly, in general, refers to when a single firm dominates a market with no close substitutes for its product, as demonstrated by Microsoft's position in operating systems.
Step-by-step explanation:
A natural monopoly is an industry in which economies of scale are so extensive that the market is better served by a single firm.
This occurs when it's more cost-effective for one producer to supply goods or services to an entire market due to the high fixed costs and low marginal costs associated with such industries.
For instance, once the main water pipes or electrical lines are laid through a neighborhood, the marginal cost of providing service to additional homes is nominal. Investing in duplicate infrastructures by new entrants would be unnecessarily costly and inefficient, thus one company can serve the whole market effectively.
A concrete example of a natural monopoly would be the utilities sector, like water and electricity services, where the infrastructure costs are prohibitively high, discouraging competition. Another famous example of a monopoly is Microsoft, which has been regarded as such due to its dominance in the operating systems market, even though it isn't a natural monopoly but a result of business strategy and market dynamics.
In contrast to a monopoly, an oligopoly exists when a few firms dominate the market. This structure is characterized by differentiated products and significant market power. The actions of a single firm in an oligopoly can have substantial effects on its competitors, leading to potential collaborative strategies such as collusion, to limit competition and maximize profits.