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Monopolistic Markets

Markets where a certain product or service is offered by only one company

What are Monopolistic Markets?

Monopolistic markets are markets where a certain product or service is offered by only one company. A monopolistic market structure has the features of a pure monopoly, where a single company fully controls the market and determines the supply and price of a product or service. Hence, a monopolistic market is a non-competitive market.

 

Monopolistic Markets

 

Summary

  • Monopolistic markets exist when there is a single supplier for a good or service.
  • The absence of competition in a monopolistic market allows the firm to determine the price and quantity of a product or service.
  • A monopolistic market arises when a company controls a crucial resource, experiences increasing returns to scale, low elasticity of demand, and has technological superiority.

 

Characteristics of Monopolistic Markets

In a competitive market, numerous companies are present in the market and supply identical products. Its demand curve is flat, whereas, in a monopolistic market, the demand curve is downward sloping. Companies that are operating in a competitive market can sell any desired quantity at the market price.

The following are the characteristics of a monopolistic market:

 

1. Single supplier

A monopolistic market is regulated by a single supplier. Hence, the market demand for a product or service is the demand for the product or service provided by the firm.

 

2. Barriers to entry and exit

Government licenses, patents, and copyrights, resource ownership, decreasing total average costs, and significant startup costs are some of the barriers to entry in a monopolistic market.

When one supplier controls the production and supply of a certain product or service, other companies are unable to enter the monopolistic market. If the government believes that the product or service provided by the monopoly is necessary for the welfare of the public, the company may not be allowed to exit the market.

Generally, public utility companies – such as electricity companies and telephone companies – may be prevented from exiting the respective market.

 

3. Profit maximizer

In a monopolistic market, the company maximizes profits. It can set prices higher than they would’ve been in a competitive market and earn higher profits. Due to the absence of competition, the prices set by the monopoly will be the market price.

 

4. Unique product

In a monopolistic market, the product or service provided by the company is unique. There are no close substitutes available in the market.

 

5. Price discrimination

A company that is operating in a monopolistic market can change the price and quantity of the product or service. Price discrimination occurs when the company sells the same product to different buyers at different prices.

Considering that the market is elastic, the company will sell a higher quantity of the product if the price is low and will sell a lesser quantity if the price is high.

 

Causes of the Emergence of Monopolistic Markets

A monopolistic market comes into existence because of the following reasons:

  1. A company controls a key natural resource and may restrict the resource supply to other companies. Thus, it controls the final price in the market.
  2. The company is given the right by the government for the exclusive production of a product or service.
  3. The increasing returns to scale may lead to one supplier becoming more efficient than the others. This results in a natural monopoly.
  4. The absence of a substitute product or service; hence low demand elasticity allows a company to charge prices higher than the marginal cost
  5. Technological advantages and innovation may sometimes result in monopolistic markets.
  6. Legal barriers comprising copyrights, licenses, patents

 

Government Regulation

As difficult as it is to replicate a perfectly competitive market in reality, it is equally impossible to replicate a monopolistic market model.

Usually, the government grants monopolies to public utility companies – telephone, natural gas supply, and power generation. However, the government may regulate the monopolistic market to prevent monopolies from setting excess prices.

Also, in a monopolistic market, the company may not maintain quality service. Hence, government regulation ensures that the company follows the minimum service standard required.

The government can regulate a monopolistic market through the following:

  1. Limiting the increase in price
  2. Merger regulation
  3. Separating monopolies
  4. Investigating unfair practices and cartels
  5. Ownership by the government – nationalization of the firm

 

Related Readings

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Natural Monopoly
  • Monopolistic Competition
  • Market Saturation
  • Price Discrimination

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