One of the misconceptions a lot of people have over monopolies is the confusion of an artificial monopoly over a natural monopoly. An artificial monopoly is created by the government, through protectionist legislation that regulate an industry thereby keeping out any new prospect companies from entering the market place. (Environmental regulations have also been known to serve the same perverse consequence). For example, long ago cable companies were given "territories" in providing cable service to customers, thereby creating artificial monopolies all over the country. Another example, all states have liquor laws that divide up the state into territories of liquor distributorship. If you sell for instance Budweiser, you are given a territory to sell Budweiser whereby no other distributor can sell Budweiser in your territory. This also applies to environmental regulations, we are seeing it today on the news. The oil companies are an artificial monopoly because of over-bearing environmental regulations that prevent anyone from drilling new oil reserves in the United States.



A natural monopoly (let's say company x) is one where the free market, because of inherently high costs to produce a certain good or service, yields a monopoly to produce said good or service. But a natural monopoly can't get away with charging too high a price, because if a price is charged too high, then another prospective company could enter the market and make a huge profit by underselling company x. Even though the start up costs would be very high, there would be a lot to gain in a return on that investment because company x charged such a high price, even charging just a little under company x's prices will yield high profits. So company x responds by dropping the price, or knows they don't want more companies to compete with, and will thus not raise the price too high. Natural monopolies can also not charge too high a price because of "substitution". This is where a different product, but still similiar enough, takes over the market. For example, if the price of beef goes too high for consumers, consumers stop buying beef and start buying chicken for their food. In this instance, chicken is a substitute for beef. So really natural monopolies are either good, because they are providing a good at a price people are willing to pay for, or they simply cannot last for too long because of increased competition or substitution of the product.



Now, in truly free markets, there is a scale of one extreme to the other, all depending on how expensive it is to start up a company to sell a certain good or service and what it cost to produce said good and service. On one extreme there's only one company selling product (x) let's say. And the other extreme, there's millions of companies selling product (x). The free market comprises of a multitude of markets with varying degrees of competition within it.



Now if there are too many companies selling product (x), you start to see some go out of business, or some try to restructure and sell a different product, or sell their company to a competitor. Ultimately there is a certain "equilibrium" that's attained where the "correct" amount of competition for a particular market exists.