What Is a Monopolistic Exchange?
A monopolistic market is a theoretical condition that describes a market where only one company may offer products and servings 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 after, the monopoly firm can restrict output, raise prices, and enjoy super-normal profits in the long run.
- A monopoly draws a market situation where one company owns all the market share and can control prices and output.
- A pure monopoly infrequently occurs, but there are instances where companies own a large portion of the market share, and ant-trust laws apply.
- Altria, the tobacco fabricator, has monopolistic-type control over the tobacco market.
Understanding Monopolistic Markets
A monopolistic market is a market-place structure with the characteristics of a pure monopoly. A monopoly exists when one supplier provides a particular good or maintenance to many consumers. In a monopolistic market, the monopoly, or the controlling company, has full control of the market, so it sets the price and fit out of a good or service.
Purely monopolistic markets are scarce and perhaps even impossible in the absence of absolute barriers to entrant, such as a ban on competition or sole possession of all-natural resources.
When they do occur, the monopoly that sets the price and furnish of a good or service is called the price maker. A monopoly is a profit maximizer because by changing the supply and price of the correct or service it provides it can generate greater profits. By determining the point at which its marginal revenue equals its marginal set someone back, the monopoly can find the level of output that maximizes its profit.
With generally only one seller controlling the output and distribution of a good or service, other firms cannot enter the market. There are typically high barriers to account, which are obstacles that prevent a company from entering into a market. Potential entrants to the market are at a weak spot because the monopoly has the first-mover advantage and can lower prices to undercut a potential newcomer and prevent them from gaining superstore share.
Since there is only one supplier, and firms cannot easily enter or exit, there are no substitutes for the goods or ceremonies. Therefore, a monopoly also has absolute product differentiation because there are no other comparable goods or services.
The Telling of Monopolies
The term “monopoly” originated in English law to describe a royal grant. Such a grant authorized one merchant or gathering to trade in a particular good while no other merchant or company could do so.
Historically, monopolistic markets arose when pick producers received exclusive legal privileges from the government, such as the arrangement reached between the Federal Communications Commission (FCC) and AT&T between 1913 and 1984. During this years, no other telecommunications company was allowed to compete with AT&T because the government erroneously believed the market could simply support one producer.
More recently, short-run private companies may engage in monopoly-like behavior when production has to some degree high fixed costs, which causes long-run average total costs to decrease as output increases. The more of this behavior could temporarily allow a single producer to operate on a lower cost curve than any other fabricator.
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 constant product or service, could charge a premium to their customers. Consumers have no substitutes and are forced to pay the price for the special-occasions dictated by the monopolist. In many respects, this is an objection against high prices, not necessarily monopolistic behavior.
The model economic argument against monopolies is different. According to
Regulation of a Monopolistic Market
As with the model of perfect championship, the model for a monopolistic competition is difficult or impossible to replicate in the real economy. True monopolies are typically the product of organizations against the competition. It is common, for instance, for cities or towns to grant local monopolies to utility and telecommunications companies.
Even so, governments often regulate private business behavior that appears monopolistic, such as a situation where one unshaken owns the lion’s share of a market. The FCC, World Trade Organization, and the European Union each have rules for watch over monopolistic markets. These are often called antitrust laws.