In the natural gas industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary pipes and hoses makes it risky and, most likely, unprofitable for competitors to enter the market.

A monopolist, unlike a competitive firm, has some market power. It can raise its price, within limits, without the quantity demanded falling to zero. The main source of a monopolist's market power is barriers to entry - that is, obstacles that make it difficult for competitors to enter the market. Which of the following best describes the source of the monopolist's market power in the preceding scenario?

a. Economies of scale
b. Innovation
c. Hard to duplicate resources

Economies of scale are the average reduction in costs (not necessarily the reduction in total costs) per unit of output produced, when a firm makes large-scale investments.

In other words, the theory of economies of scale tells us that when a firm expands capacity, the average cost of each unit of labor and capital used to produce something falls.

In this case, the natural gas industry is what is sometimes called a natural monopoly. This is because in order for it to be profitable, a firm has to expand initial capacity quite a lot, to the point that it starts enjoying the benefits of economies of scale, and only a few firms can count on that amount of capital.