Monopolistic Markets Characteristics History and Effects

Monopolistic Markets: Characteristics, History, and Effects

What Is a Monopolistic Market?

A monopolistic market describes a market where only one company may offer products and services to the public. It is the opposite of a perfectly competitive market. In a purely monopolistic model, the monopoly firm can control prices and enjoy super-normal profits.

Key Takeaways

– A monopoly is 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 antitrust laws apply.

– Altria, the tobacco manufacturer, has monopolistic-type control over the tobacco market.

Understanding Monopolistic Markets

A monopolistic market is a market structure with the characteristics of a pure monopoly. It exists when one supplier provides a particular good or service to many consumers. The monopoly sets the price and supply of a good or service.

Purely monopolistic markets are scarce and perhaps impossible without absolute barriers to entry, such as a ban on competition or sole possession of all-natural resources.

The monopoly that sets the price and supply of a good or service is called the price maker. It is a profit maximizer by changing the supply and price of the good or service it provides. It determines the level of output that maximizes its profit by finding the point where its marginal revenue equals its marginal cost.

There are typically high barriers to entry for other firms because the monopoly has the first-mover advantage and can prevent them from gaining market share. Since there are no substitutes for the goods or services, the monopoly also has absolute product differentiation.

The History of Monopolies

The term “monopoly” originated in English law to describe a royal grant. Historically, monopolistic markets arose when single producers received exclusive legal privileges from the government. For example, the arrangement reached between the Federal Communications Commission (FCC) and AT&T between 1913 and 1984. During this period, no other telecommunications company could compete with AT&T.

More recently, short-run private companies may engage in monopoly-like behavior when production has high fixed costs, allowing a single producer to operate on a lower cost curve than any other producer.

Effects of Monopolistic Markets

The typical objection to monopolistic markets is that a monopoly could charge a premium to their customers due to the absence of other suppliers. Consumers have no substitutes and are forced to pay the price dictated by the monopolist. However, this is mainly an objection against high prices, not necessarily monopolistic behavior.

The economic argument against monopolies is that they restrict output, reducing total real social income. Despite the existence of monopolistic powers, consumers often have alternatives, which makes it uncommon for monopolistic markets to successfully restrict output or enjoy super-normal profits in the long run.

Regulation of a Monopolistic Market

Monopolistic competition is difficult or impossible to replicate in the real economy. True monopolies are typically the result of regulations against competition. Governments often regulate private business behavior that appears monopolistic. The FCC, World Trade Organization, and the European Union each have rules for managing monopolistic markets, often referred to as antitrust laws.