A natural monopoly is when one company has complete control over a market due to eliminating competition or achieving economies of scale. These are highly regulated by the government, and options for regulation range from letting the company regulate itself to public ownership. The existence of natural monopolies is debated among economists.
A natural monopoly is an economic situation in which the main supplier of a particular good or service essentially has complete control over the market. This is most likely to happen when an industry is in its infancy or other companies have tried unsuccessfully to capture significant market share. Other causes of a natural monopoly prevail when all competition is eliminated.
Generally, 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 utilities, such as waste and gas services, when a company becomes so large that it effectively drives out all competition. To cap prices so consumers can pay for utilities, companies work with government agencies to regulate standard service costs.
According to economies of scale, a company will achieve a natural monopoly when that business has penetrated market share to a level that has reduced the cost of doing business to a level that the competition cannot match. Essentially, no other firm in the market can afford a rival business and attempt to match or undercut the monopoly price. This is true regardless of the type of business, as long as the company has almost complete control over the market.
When a bureaucratic organization intervenes in a natural monopoly, it has several options for 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 company. Typically, government entities get involved in a limited way by regulating the amount of profit the company can make, such as pricing the rate of return at 10%. Governments can also intervene with legislation and establish self-managed competition or even simply seize the company and turn it into public works. Other options include splitting the company into smaller companies, as was the case with the AT&T telephone company in the United States in 1984.
The existence of natural monopolies in a free market society is a basis for debate among economic theorists. Certain economists argue that monopolies are only theoretical in these societies and therefore can be subject to competition when the market demands it. People who take this position do not believe in any government regulation. At the other end of the spectrum are those who feel that a natural monopoly can occur even when there are multiple firms. For example, Coke and Pepsi control the vast majority of the soft drink industry and charge roughly the same price for their products.
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