Monopolistic Market

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What is a 'Monopolistic Market'

A monopolistic market is a theoretical construct in which only one company may offer products and services to the public. This is the opposite of a perfectly competitive market, in which an infinite number of firms operate. In a purely monopolistic model, the monopoly firm is able to restrict output, raise prices and enjoy super-normal profits in the long run.

BREAKING DOWN 'Monopolistic Market'

Purely monopolistic markets are extremely rare 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.

Causes of Monopolistic Markets

Historically, monopolistic markets arose when single producers received exclusive legal privilege from the government, such as the arrangement 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.

In fact, 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 good, while no other merchant or company could do so.

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. This could temporarily allow a single producer to operate on a lower cost curve than any other producers.

Effects of Monopolistic Markets

The common political and cultural objection to monopolistic markets is that a monopoly could charge a premium to their customers who, having no useful substitutes, are forced to give up even more money to 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 the 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 letters, consumers often have many alternatives, such as using standard mail through FedEx or UPS, or using email instead of a letter. For this reason, it is extremely uncommon for monopolistic markets to successfully restrict output or enjoy super-normal profits in the long run.

Regulation of Monopolistic Markets

As with the model of perfect competition, the model for monopolistic competition is difficult or impossible to replicate in the real economy. True monopolies are generally the product of regulations against 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 one firm owning a large share of a market. The FCC, WTO and EU each have rules for dealing with monopolistic markets. These are often called antitrust laws.

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