What Is a Monopolistic Market?

A monopolistic market is a theoretical construct that describes a market where only one company may offer products and services to the public. A monopolistic market 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.

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Monopolistic Market

Causes of Monopolistic Markets

Purely monopolistic markets are scarce 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.

Key Takeaways

  • A monopoly describes 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 ant-trust laws apply.
  • Altria, the tobacco manufacturer, has monopolistic-type control over the tobacco market.

The History of Monopolies

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

More recently, 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. The effect of this behavior 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, in the absence of other suppliers of the same product or service, could charge a premium to their customers. Consumers have no substitutes and are forced to pay the price for the goods dictated by 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 of 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 mail, consumers often have many alternatives such as using standard mail through FedEx or UPS or email. For this reason, it is uncommon for monopolistic markets to successfully restrict output or enjoy super-normal profits in the long run.

Regulation of a Monopolistic Market

As with the model of perfect competition, the model for a monopolistic competition is difficult or impossible to replicate in the real economy. True monopolies are typically the product of regulations against the 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.

Real World Example

Near-monopolies exist in the United States. For example, tobacco companies are subject to strict regulations, legislation, and lawsuits not to mention taxation. According to financial news giant, "Bloomberg.com", tobacco stock prices plunged in October 2018, when the Food and Drug Administration (FDA) announced that it might impose strict new rules calling for a reduction in the nicotine levels in cigarettes.

In this volatile market environment, many tobacco companies have disappeared and Altria, the parent company of Philip Morris and the name behind Marlboro, monopolizes the tobacco market.

Altria had estimated ownership of 50% of the cigarette market in 2018, according to "Marketwatch.com", which marked a decline of 0.83%. The cigarette market is shrinking, but CNBC reports that e-cigarettes and smokeless products are a growing market. Altria's MarkTen and Green Smoke e-cigarettes, however, have not fared well. However, according to CNBC, the position that Altria holds in the market means that it can buy an ownership stake in Juul, the market leader in e-cigarettes. In late 2018, Altria announced plans to buy a 35% stake in Juul for $12.8 billion, according to NPR. Thus, if smokers switch from smoking Marlboros to Juul, which is currently increasingly the case, Altria will not suffer.