To be fair (and probably pedantic :), natural monopolies don't happen in any free market given enough time. It's more like, certain very specific markets (such as ISPs and desktop operating systems, apparently) have built-in dynamics that lead to natural monopolies. Most markets aren't like this and can remain competitive without regulation.
My desktop OS example requires some clarification- there were plenty of things Microsoft did in the '80s and '90s where they exploited their position in the market to increase market share. Per-processor licensing fees are a prime example of that- a PC vendor that wanted to license a Microsoft OS would have to pay a licensing fee for every computer they sold, regardless of whether or not that computer had an MS OS on it. However, one could argue that this was a consequence of MS already having a monopoly (50% market share can be considered a monopoly in some markets), and they were exploiting that monopoly to become even more deeply entrenched. I honestly think that the desktop OS market in the pre-web days had very strong tendencies towards a natural monopoly regardless of whether or not any given player in that market was engaging in unfair business practices to achieve that monopoly.
Any time discussion about competing products revolves around which product is ultimately going to "win", there is an implicit assumption that the market those products compete in tends towards natural monopolies. It may not be true, but the people participating in those discussions think so even if they're not fully aware of it.
I agree that some markets have a greater tendency for forming natural monopolies. I think the reason for the desktop OS monopoly tendency lies in the fact that developing software and drivers for multiple operating systems is expensive. This, and the desire to have marketable skills, drives developers to one OS. And also, applications you do your work in were typically incompatible between platforms, thus creating a drive for users as well to band together on one OS... Some markets have a huge tendency for natural monopolies, perhaps mostly due to this cost of switching (or sitting in two or more chairs, so to speak).
But even in a market where you can easily switch one supplier for another, there often remains a helpful factor for grouping - everything costs less in large quantities ;) And many administrative costs can be reduced. Not to mention that perfect competition would, strictly mathematically speaking, drive profits towards zero...
> Most markets aren't like this and can remain competitive without regulation.
It's clear that some markets are like this, and some aren't. It's not at all clear to me that most markets aren't. In fact, i believe the opposite - most markets are like this. I believe that in most markets, economies of scale, cost of entry, and the coercive power of large participants outweigh the incremental efficiencies of new innovators.
If there is any logic or data which supports the contrary position, i would be interested to hear it.
My desktop OS example requires some clarification- there were plenty of things Microsoft did in the '80s and '90s where they exploited their position in the market to increase market share. Per-processor licensing fees are a prime example of that- a PC vendor that wanted to license a Microsoft OS would have to pay a licensing fee for every computer they sold, regardless of whether or not that computer had an MS OS on it. However, one could argue that this was a consequence of MS already having a monopoly (50% market share can be considered a monopoly in some markets), and they were exploiting that monopoly to become even more deeply entrenched. I honestly think that the desktop OS market in the pre-web days had very strong tendencies towards a natural monopoly regardless of whether or not any given player in that market was engaging in unfair business practices to achieve that monopoly.
Any time discussion about competing products revolves around which product is ultimately going to "win", there is an implicit assumption that the market those products compete in tends towards natural monopolies. It may not be true, but the people participating in those discussions think so even if they're not fully aware of it.