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What Is a Monopolistic Market?
A monopolistic market is a market structure with the characteristics of a pure monopoly. A monopoly exists when one supplier provides a particular good or service to many consumers. In a monopolistic market, the monopoly (or dominant company) exerts control over the market, enabling it to set the price and supply.
Key Takeaways
- Monopolistic markets exist when one company is the dominant provider of a good or service.
- Limited competition and high barriers to entry enable the monopoly in this market to set the price and supply of a good or service.
- Monopolistic markets are controversial because they can lead to price-gouging and deteriorating quality due to a lack of alternative choices.
- Regulators may intervene to prevent monopolistic markets from existing if they believe such a market is detrimental to the general public.
How a Monopolistic Market Works
The monopoly that sets the price and supply of a good or service is called the price 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 its marginal revenue equals its marginal cost, the monopoly can find the level of output that maximizes its profit.
Monopolistic markets generally consist of only one seller controlling the production and distribution of a good or service. There are typically high barriers to entry, which are obstacles that prevent other companies from entering the market. Potential entrants to the market are at a disadvantage because the monopoly has a first-mover advantage and can lower prices to undercut a potential newcomer and prevent them from gaining market share.
Because 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 absolute product differentiation because there are no other comparable goods or services.
Are Monopolistic Markets Inefficient?
Both historically and in modern times, economists have been divided on the theory of monopolistic competition. Economists agree that most monopolistic activity is the result of government privileges to certain firms; however, many also believe that a natural industry concentration, or a monopoly or oligopoly, does not result in market inefficiencies. Inefficiencies only arise when less of a good or service is provided at economic profits that are higher than the market-clearing level.
Natural Monopolies
A natural monopoly is a type of monopoly that occurs in an industry that has extremely high fixed costs of distribution. For example, electricity supply requires huge infrastructure built with cables and grids. For the company that pays for the infrastructure, the costs are considered sunk costs, or costs that, when incurred, cannot be recovered.
Typically, there is one company that provides the service because if other entrants were encouraged to enter the market, it would cause inefficiencies and loss to society, and the competitor would have to duplicate the heavy infrastructure.
Natural monopoly theory is challenged both theoretically and empirically. The theoretical challenges imply that methodological problems exist in general equilibrium microeconomics and that there are flaws in the perfect competition models. Other economists claim that natural monopoly theory is not borne out by history, and unregulated industries controlled by large firms show increasing productivity, declining real costs, and plenty of new entrants to the market.
Criteria of a Monopolistic Market
In a pure monopoly market structure, there is only one firm in a particular industry. However, where regulations are concerned, the U.S. courts have not unanimously identified a precise threshold of market share beyond which a company could be considered to possess monopoly power.
Over the years, judges have arrived at different conclusions for what constitutes a dominant enough market share. Based on historical cases, the U.S. Department of Justice concluded that any market can potentially be considered monopolistic if one firm controls at least 50% of it.
What Are the Key Characteristics of a Monopolistic Market?
A monopolistic market describes a market in which one company is the dominant provider of a good or service. In theory, this preferential position gives said company the ability to restrict output, raise prices, and enjoy super-normal profits in the long run.
What Are Some Examples of a Monopolistic Market?
Historically, John D. Rockefeller’s Standard Oil and J.B. Duke’s American Tobacco Co. are classic examples of monopolies. More recently, Microsoft has long commanded a virtual monopoly on personal computer operating systems. As of August 2021, its desktop Windows software still had a market share of about 75%, down from about 97% in 2006.
Are Monopolistic Markets Bad?
Monopolistic markets are highly controversial, mainly because—theoretically—they give the monopoly the ability to set extortionately high prices for products and services that the public needs, owing to a lack of available substitutes.
That said, governments in most countries will never let this happen and only permit monopolistic markets when they are deemed beneficial to the public. In these cases, those permitted to operate as the dominant player are usually heavily regulated and not free to charge whichever prices they choose.
How Are Monopolistic Markets Regulated?
The Federal Communications Commission (FCC), World Trade Organization, and the European Union each have their own rules for managing monopolistic markets. These rules are often called antitrust laws and are designed to protect consumers from predatory business practices and ensure fair competition.