What is a monopoly market? Characteristics and FAQs
By Indeed Editorial Team
Published 7 June 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Healthy competition amongst businesses is great for the economy, as it causes them to continually improve products and price their products fairly. Monopoly markets can occur when there is an absence of competition or when governments intervene, which is when one company dominates a market. Knowing more about monopoly markets can help you understand why people generally consider them to be undesirable and why governments take action to prevent them. In this article, we explain what a monopoly market is and look at their characteristics.
What is a monopoly market?
In answering the question ‘what is a monopoly market', it's useful to consider what a monopoly is. A monopoly is when a company has exclusive control over the supply or trade of a commodity or service and no threatening competition. In a monopoly market, consumers have no choice but to buy from the company that controls the market, which usually means they have fewer products to choose from.
The dominant company prevents other sellers from entering the market in various ways, allowing them to maintain their monopoly. Here are some situations that monopolies can arise from:
Free-market capitalism: When a market is completely free, monopolies tend to form eventually as the most successful company finds greater success than the others. Once at that point, companies gain power that they can use to stifle the growth of rivals, such as through predatory pricing.
Government barriers: While governments attempt to limit the formation of monopolies, they contribute to their creation sometimes, or even create them themselves. This can occur through nationalisation, for example, which is when a government takes control over the means of production in an industry.
Because it can be difficult for competing businesses to enter a monopolised market, monopolies, once formed, tend to persist for many years. Large-scale production enables them to have a much greater output and lower prices. Monopolies also acquire smaller companies that attempt to enter the market, increasing their market share and eliminating competition simultaneously. Such market controllers can also use predatory pricing, which is making prices unreasonably low so that smaller firms cannot compete, as a way of preventing competitors from entering a market.
While monopolies sometimes form as a result of fair competition, or even by the guidance of the state, policies exist in most countries to prevent monopoly markets. Monopolisation is negative in many ways. In particular, the price and quality of products can stagnate instead of improve due to the absence of competition. Market controllers can also take advantage of the fact that consumers have no choice but to buy from them by dropping their standards to boost profitability. Chapter two of the Prohibition in the Competition Act exists to deter the formation of monopolies in the UK.
Characteristics of a monopoly market
A monopoly market has certain characteristics, such as:
A market controller
Because they lack competition, monopolies can determine their own prices instead of letting the market affect pricing. This can cause a monopoly company to be the controller of a product or service, meaning that customers who want the product or service have no choice but to purchase from this company. Economies of scale also help monopolies maintain control because it gives them the resources they need to tightly control prices.
Control of supply and demand
Supply and demand typically dictate business practices. In a monopoly market, the company has control over the supply and the demand. They can choose to reduce supply, regardless of the level of demand. This means that customers have less of a choice of products they buy or the price at which they buy them. Monopoly markets lead to a lack of differentiation in the market, so customers cannot compare the quality of products with other similar products.
Limited access to information
Another barrier to entry into a monopoly market is a lack of access to important information. Monopoly market owners usually have access to information that competitors don't, making it difficult for anyone else to enter the market. Monopolies are also usually in industries with high start-up costs, making it even more difficult for potential competitors to take over any share of the market.
Less innovation of products
A monopoly market can inhibit innovation. New products often arise out of competition as businesses compete with one another. Without multiple businesses in the market, the monopoly brand is less likely to develop new products or improve on existing ones. With the monopoly company having control of the market, the business can also produce inferior products with no repercussions.
Monopoly vs. competitive market
A monopoly market and a competitive market both maximise profits by selling a product for the highest price possible, but a monopoly market has more control over pricing because of the lack of competition. In a competitive market, businesses innovate and focus on more than just revenue because customers can choose other products in the market based on quality or price. Customer demand for products can also help set the price in a competitive market, which can make it more likely for a successful economy to develop.
Frequently asked questions about a monopoly market
Here are answers to some frequently asked questions about monopoly markets:
Can the government prevent monopolies?
Often, through the creation of regulations, the government may try to prohibit companies in the same industry from merging or acquiring other companies to avoid the creation of a monopoly. Brands may sometimes try to merge or buy out a competitor to gain more market share, but if the government believes that doing so might lead to a monopoly, it may attempt to block the merger from happening or require the company to divide its assets. The government may also prevent a company from entering the market if it already has market share.
Can the government cause monopolies?
The government may set up monopolies when it provides certain services, like utilities or the postal service. This is called nationalisation, and it's when governments assume control over a particular market, usually for the good of the country. Some services, like railway services, are well-suited to monopolisation and central control, as it allows for a standardised service that everyone can access. Governments may also grant private companies exclusive rights to provide products or services, usually intending to keep costs down.
Do monopolies occur naturally?
Some industries can produce natural monopolies. Industries that have natural barriers to entry or high start-up costs can lead to a primary company having control over the market. Also, companies that take out a patent on their product may be the only company that can legally produce a certain product for a certain period.
Do monopoly markets affect jobs?
Because factors such as innovation and customer satisfaction are usually not as important in a monopoly market, businesses may rely on outdated practices and hire fewer employees, which can influence the job market. Regulations, as well as easing barriers to entry, can be important in improving efficiency and maintaining a consistent job market.
Why are monopolies controversial?
Monopolies are controversial because they create unfair market conditions and take away consumer choice. The market controller may have got to that position by being the best, but once they have established a monopoly market, they may not be the best but still maintain control. Other rivals may exist who provide a better product or service, but for reasons covered, they are not able to enter the market. Monopolies can also cause unfairly high prices.
What are the different types of monopolies?
Economists divide monopolies into four distinct categories: natural monopolies, geographical monopolies, technological monopolies and government monopolies. A natural monopoly is one that has occurred within fair market conditions, where a company produces the best or cheapest product and rises to dominance. Geographical monopolies occur because of location and when a company has no competition in the market location. Technological monopolies happen when one company, due to a technological breakthrough, owns the production method of a product. A government monopoly is one that the government owns and operates, occurring because of nationalisation.
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