A natural monopoly is an economic situation in which the chief supplier of a particular good or service essentially has complete control over the marketplace. This occurs most readily when an industry is either in its infancy or other companies have unsuccessfully attempted to garner a significant market share. Other causes of a natural monopoly are prevalent when all competition has been driven out of business.
Usually, these types of market conditions are considered a legal monopoly and therefore highly regulated by the government. This is most common in the field of public utilities such as waste disposal and gas services, when one company has become so large that it effectively drove out all competition. In order to cap the prices so consumers can afford the utilities, the companies work with government agencies to regulate standard costs of service.
According to the economics of scale, a company will reach a natural monopoly when that business has penetrated market share to a degree that it has reduced the cost of doing business to a degree that competition cannot match. Essentially, no other company in the market can feasibly start a rival business and attempt to match or undercut the price of the monopoly. This holds true no matter the type of business as long as the firm has near complete control over the market.
When a bureaucratic organization intervenes in a natural monopoly, it possesses a number of options with how to regulate the prices of the product or service. These options range from letting the company regulate itself to taking public ownership of the firm. Usually, government entities involve themselves in a limited fashion by regulating the amount of profit the company can make, such as price fixing the rate of return at 10 percent. Governments can also intervene with legislation and set up competition managed by itself or even simply seize the company and turn it into a public works. Other options include breaking up the company into smaller firms, as was the case with the telephone company AT&T® in the United States in 1984.
The existence of natural monopolies in a free market society is a basis for debate amongst economic theorists. Certain economists argue that monopolies are only theoretical in such societies and thus can be subject to competition when the market demands. People who take this position believe in no government regulation. On the other end of the spectrum, are those who feel a natural monopoly can occur even when multiple companies exist. For example, Coke® and Pepsi® control the vast majority of the soda industry and charge roughly the same price for the products.