What Is a Monopolistic Market?
A monopolistic market is a theoretical condition that describes a market where only one company may offer products and services to the public. A monopolistic market is the opposite of a perfectly competitive market, in which an infinite number of firms operate. In a purely monopolistic model, the monopoly firm canrestrict output, raise prices, and enjoy super-normal profits in the long run.
Key Takeaways
- A monopoly describes a market situation where one company owns all the market share and can control prices and output.
- A pure monopoly rarely occurs, but there are instances where companies own a large portion of the market share, and ant-trust laws apply.
- Altria, the tobacco manufacturer, has monopolistic-type control over the tobacco market.
Understanding Monopolistic Markets
Amonopolistic marketis a market structure withthe characteristics of apure monopoly. A monopoly exists when one supplier provides a particular good or service tomany consumers.In a monopolistic market, the monopoly, or the controlling company, has full control of the market,so itsets the price and supply of a good or service.
Purely monopolistic markets are scarce and perhaps even impossible in the absence of absolute barriers to entry, such as a ban on competition or sole possession of all-natural resources.
When they do occur, the monopoly that sets the price and supply of a good or service is called theprice maker. A monopoly is a profit maximizer because by changing the supply and price of the good or service it provides it can generate greater profits. By determining the point at which itsmarginal revenueequals its marginal cost, the monopoly can find the level of output that maximizes its profit.
With generallyonly one seller controlling the production and distribution of a good or service, other firms cannot enter the market. There are typically highbarriers to entry, which are obstacles that prevent a companyfrom entering into a market. Potential entrants to the market are at a disadvantage because the monopoly hasthe first-mover advantageand can lower prices to undercut a potentialnewcomer and prevent them from gaining market share.
Since there is only one supplier, and firms cannot easily enter or exit, there are no substitutes for the goods or services. Therefore, a monopoly also has absoluteproduct differentiation because there are no other comparable goods or services.
The History of Monopolies
The term “monopoly” originated in English law to describe a royal grant. Such a grant authorized one merchant or company to trade in a particular goodwhile no other merchant or company could do so.
Historically, monopolistic markets arose when single producers received exclusive legal privileges from the government, such as the arrangement reached between the Federal Communications Commission (FCC) and AT&T between 1913 and 1984. During this period, no other telecommunications company was allowed to compete with AT&T because the government erroneously believed the market could only support one producer.
More recently, short-run private companies may engage in monopoly-like behavior when production has relatively high fixed costs, which causes long-run average total costs to decrease as output increases. The effect of this behavior could temporarily allow a single producer to operate on a lower cost curve than any other producer.
Effects of Monopolistic Markets
The typicalpolitical and cultural objection to monopolistic markets is that a monopoly, in the absence of other suppliers of the same product or service, could charge a premium to their customers. Consumers have no substitutes and are forced to pay the price for the goods dictated by the monopolist. In many respects, this is an objection against high prices, not necessarily monopolistic behavior.
The standard economic argument against monopolies is different. According to neoclassical analysis, a monopolistic market is undesirable because it restricts output, not because of monopolist benefits by raising prices. Restricted output equates to less production, which reduces total real social income.
Even if monopolistic powers exist, such as the U.S. Postal Service’s legal monopoly on delivering first-class mail, consumers often have many alternatives such as using standard mail through FedEx or UPSor email. For this reason, it is uncommon for monopolistic markets to successfully restrict output or enjoy super-normal profits in the long run.
Regulation of a Monopolistic Market
As with the model of perfect competition, the model for a monopolistic competition is difficult or impossible to replicate in the real economy. True monopolies are typicallythe product of regulations against the competition. It is common, for instance, for cities or towns to grant local monopolies to utility and telecommunications companies.
Nevertheless, governments often regulate private business behavior that appears monopolistic, such as a situation where one firm owns the lion'sshare of a market. The FCC, World Trade Organization, and the European Union each have rules for managing monopolistic markets. These are often called antitrust laws.
