Final answer:
A gas company with an established distribution network is likely a natural monopoly, where a single firm can efficiently supply the entire market at lower costs due to high fixed costs and low marginal costs for additional customers. This often leads to regulation to ensure fair pricing and service.
Step-by-step explanation:
Suppose a gas company has an established distribution network to supply natural gas to a particular region. This is likely to be a natural monopoly because only a single firm can cover its costs while producing at its most efficient scale.
A natural monopoly occurs when the fixed costs are large relative to variable costs, leading to economies of scale that favor a single provider. In this case, the distribution network of the gas company represents substantial fixed costs. Once this network is in place, adding additional customers incurs minimal marginal costs. If a competing company were to set up a parallel network, it would duplicate the investment with no additional efficiency, causing higher average costs and prices for consumers.
This natural monopoly is often regulated to prevent excessive pricing and ensure that the benefits of economies of scale are passed on to consumers. In the given scenario, splitting up the natural monopoly would likely lead to inefficiencies and increased costs for customers, which justifies its single-firm status in the market.