Loading the player...

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 can 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.

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 producer.

Effects of Monopolistic Markets

The typical 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 relinquish 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 typically 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 a situation where one firm owns the lion's share 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.

RELATED TERMS
  1. Monopolistic Competition

    Characterizes an industry in which many firms market products ...
  2. Monopolistic State Fund

    A monopolistic state fund is a government owned and operated ...
  3. Monopoly

    A monopoly is a situation in which one corporation, firm or entity ...
  4. Franchised Monopoly

    A franchised monopoly is a company sheltered from competition ...
  5. Marginal Revenue (MR)

    Marginal revenue is the added revenue from the sale of one more ...
  6. Natural Monopoly

    A natural monopoly is the domination of an industry or sector ...
Related Articles
  1. Small Business

    Antitrust Defined

    Check out the history and reasons behind antitrust laws, as well as the arguments over them.
  2. Small Business

    What are antitrust laws?

    Learn about antitrust laws or "competition laws." These statutes protect consumers from predatory business practices by ensuring fair competition exists.
  3. Insights

    How and Why Companies Become Monopolies

    Without competition, monopolies can raise prices and lower quality, leaving consumers little choice. But monopolies can benefit consumers as well.
  4. Small Business

    How Monopoly Antitrust Laws Affect Consumers

    Monopolies often receive a negative reception, but sometimes they can benefit consumers.
  5. Insights

    A Short History of the US Federal Trade Commission

    Since the early 1900s, the Federal Trade Commission has preventing anticompetitive, deceptive, and unfair business practices.
  6. Investing

    Medtronic Hit with $17M Price-Fixing Fine in China

    Medtronic's Chinese unit was slapped with a fine for monopolistic business practices.
  7. Investing

    New Monopoly Edition Ditches Paper Money (HAS)

    Hasbro's latest version of Monopoly speeds up the classic game and reflects our movement towards a cashless society. It will still probably end friendships over the "free parking" rule, though.
  8. Investing

    5 Lessons in finance and investing from Monopoly

    The classic real estate game of Monopoly can increase your chances of having a better understanding of prudent financial and investment principles.
RELATED FAQS
  1. What is the difference between a monopolistic market and perfect competition?

    Learn about monopolistic and perfectly competitive markets, what they are, and the main differences between perfect competition ... Read Answer >>
  2. What are Common Examples of Monopolistic Markets?

    Providers of water, natural gas, telecommunications, and electricity have all been historically monopolistic markets. A monopoly ... Read Answer >>
  3. Are monopolies always bad?

    Learn why governments sanction some monopolies, such as monopolies over public utilities, and why these monopolies are good ... Read Answer >>
  4. How does government regulation impact the telecommunications sector?

    Read about the many ways the U.S. government regulates the telecommunications industry, including radios, telephones, TV ... Read Answer >>
  5. Why do utility stocks pay high dividends?

    Learn why utility stocks pay high dividends and how government-produced monopoly protects privileged utility companies from ... Read Answer >>
  6. Does perfect competition exist in the real world?

    There are significant obstacles preventing perfect competition in today's economy, and many economists think it is better ... Read Answer >>
Trading Center