A monopolistic market or monopoly market is significant for several reasons, one being it is so rare. In the past, companies experienced vast profits in such an environment. This all but ended with increased regulation and consumer activist groups.
Characteristics Of Monopolistic Markets
monopoly markets have one company that offers products or services to its customers (the public). In this way, the company sets whatever prices and production level it wishes. Most noteworthy, the company enjoys artificially high profits. However, in a competitive landscape, these profits are reduced.
Additionally, monopolistic markets are extremely rare in the economy today. They could, in theory, exist due to absolute control over a natural resource, or legislation banning raising barriers to entry in a market. Although unlikely, this arises when controlling powers such as governments believe the market cannot support a competitive sector.
Competitive economies are strong-history shows this is true. Innovation and competition causes growth. When a monopoly is present, it removes the incentive for innovation. The quality and usefulness of products generally stays the same. This hurts consumers and businesses alike.
Furthermore, the company in power exploits the consumers. Because no alternatives exists, consumers pay premiums for what is a less than perfect product. Also, monopolies restrict output. This is harmful to society in general, as it reduces income for workers.
Demand In A Monopoly Market
Producers in a monopoly market have a demand problem. Marginal revenue is not constant. As output increases, the amount the monopoly gets for each unit decreases. However, this is only true if the company cannot price discriminate. This is true based on the law of the demand curve. Based on this law, monopolies are next to impossible in free markets.
Finally, history taught us valuable lessons about monopolistic markets, both legal and illegal. As the negative effects mentioned in the article became reality, governing bodies stepped in and created more competitive landscapes. The result is a highly productive and relatively safe consumer world in which we live today.