Natural Monopoly: A market situation wherein a single firm can supply the socially optimal quantity of output (i.e., the quantity corresponding to the equality of price and marginal cost) at lower unit cost than two firms, three firms (or any number of firms) which each supply some fraction of the optimal output. Natural monopoly occurs where economies of scale are highly important--that is, the long run average cost curve is at a minimum at an output near what the market will bear at a price equal to average cost. See graph

Question: What public policy is indicated for natural monopoly?

Answer: Grant the firm an exclusive franchise, but impose a common carrier obligation and subject it to rate-of-return regulation by a public service commission.

Structural Features of Monopolistic Competition: Market structure featuring a relatively large number of firms that sell similar, but not identical, products. Entry barriers are low.

See E.H. Chamberlain. The Theory of Monopolistic Competition, 1933.

Real world examples (?)

Women's shoes, flour, furniture, wall covering, some office supply items, bottled water, cold cuts, paper towels, fishing lures.  

Monopolistic firms, because they sell a differentiated product, face a downward sloping, but highly elastic, demand curve. Because firms inhabiting monopolistically competitive market structures enjoy some degree of market power, the profit maximizing price will exceed marginal cost. Since P > MC, this market structure is characterized by resource misallocation.

However, some economists have argued that product heterogeneity is welfare-enhancing--i.e., some consumer derive utility from the fact the items in the same product group are not homogeneous. Thus, the welfare implications of monopolistic competition depend on the tradeoff between the conventional dead weight loss arising from a price that exceeds marginal cost and the welfare-enhancing effects of product variety.