Question

Why are railroads natural monopolies? What limits their pricing power?

Answer 1

These are natural monopolies because they have a large fixed cost in terms of the entire set up of railroad track, stations, and platforms. And then there is a very small all relative cost per passenger. This implies that the average total cost continue to decline as the number of passengers increases. Due to the continuously falling average total cost function, there are economies of scale for this industry, making it a natural monopoly.

The pricing power is limited by other means of transportation, both public and private transits. As and when the commuters find it expensive to travel through railroad, they can switch to other public transport such as public buses, taxis, or they can use their own vehicle. This indicates that the demand faced by the monopolist is not highly inelastic, limiting its market power.