Monopolistic Market Structure: Types and Examples
The monopolistic market structure is one of the four major types of economic market structures. The market structure defines how a market operates. This is because it determines the nature of competition, entry barriers, and pricing procedure.
Therefore, the market structure helps us understand the number of firms that exist in a market, the similarities or differences in the goods they produce or services they provide, as well as how easy or difficult it is for new firms to enter the market.
Having the knowledge and understanding of the market structure is especially helpful to business owners as it aids them to see the opportunities and threats in the industry and market where they operate.
It also aids firms in understanding how best to model their business such that their processes and operations are better aligned with the market structure. It further enables them to maintain or improve their market share and stay competitive.
The structure of a monopolistic market limits competition such that only one producer determines the supply and price of a particular good or service.
Due to the market dominance of one firm in a monopolistic market, there are high entry barriers that prevent new firms from joining the market and becoming competitors of the dominant company.
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What is the monopolistic market structure?
Market power, otherwise known as monopoly power, refers to the ability of a firm to change the price of a good or service or to limit production. These are possible due to the firm’s dominant position as the only provider of a service or producer of a good.
Market power is measured by the Lerner Index. The index was developed in 1934 by Abba P. Lerner, in a paper titled The Concept of Monopoly and the Measurement of Monopoly Power.
The Lerner index has a value between zero and one with firms that operate in a monopolistic market having a value of 1, indicating that they have zero marginal cost.
In a monopolistic market, the main decisions that the companies are concerned about are setting the price of their products and controlling the product’s quantity to maximize revenue.
Monopolist companies maximize revenue by setting product prices and output at the point where marginal cost is equal to marginal revenue.
Types of monopolistic markets
- De jure
- Legal
- Natural
- Pure
- Simple
De jure monopoly
This type of monopoly is one in which the government grants a firm exclusive privilege to be the only provider of a good or service. This is often achieved by excluding other market participants through specific government laws.
Competitors may also be excluded from the market through certain requirements that can only be fulfilled by a particular firm.
For example, due to the large-scale infrastructure required to supply energy and water, most regions in the United States have a specific firm that provides these services.
Governments often support monopolies in some sectors because in most instances, having only one firm providing such a good or service is more beneficial for the public due to higher reliability and effectiveness.
In addition, the cost of production and distribution of certain products may be high, hence not all companies can meet up. Furthermore, in most de jure monopolies, prices are regulated by the government to ensure consumers get value for their money.
In some instances, a government monopoly also refers to public goods that are provided by the government or nationalized industries.
When a firm dominates its industry due to nationalization, it is known as an industrial monopoly. A de jure monopoly is also referred to as a government or public monopoly.
Legal monopoly
A legal monopoly is one where a firm is protected from competitors through legal or procedural means such as copyrights, patents, and trademarks.
Natural monopoly
A natural monopoly occurs when one company can effectively supply a service or a product at a lower cost compared to any other competitors. This often occurs when such products or services have an ongoing fixed cost that is very high or when the cost to set up similar companies is huge.
Thus, other companies become naturally excluded from the market since they cannot effectively meet supply at the best value.
Pure monopoly
This type of monopoly occurs when the goods or services sold by one company do not have a close substitute in the market.
For example, Microsoft holds a pure monopoly in the computer operating system segment as several computer producers still depend on their operating system.
Simple monopoly
A simple monopoly occurs when there is an absence of competition to provide the product or service that is already provided by an existing company.
This is mostly obtainable when a company is the first to provide a certain product or service. It may also result when only one company has access to certain resources or raw materials required for the production of a good.
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What are the three characteristics of a monopoly market?
Entry barriers often occur due to government regulations that prevent other companies from entering the market such as the granting of an operating licence to only one firm. Monopoly access to certain raw materials also serves as entry barriers.
Legal restrictions such as copyrights, patents, and trademarks may also prevent other companies from entering the market as they are restricted from producing similar products to that which is already existing.
Exclusive production processes that enable companies to maximize output while minimizing cost also serve as entry barriers since only such firms can meet market demand at the lowest possible price.
In most monopolistic markets, the lack of substitute products makes demand inelastic.
These three main characteristics of a monopoly market enable monopolists to maintain their position as sole suppliers in the market.
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Monopolistic market structure examples
Examples of monopolistic market structures can be found in the public utility sector. These include postal services, energy, water, and transportation.
In the United States, each state has a particular organization that is in charge of energy generation, transmission, or distribution. For example, the New York State Electric and Gas Corporation provides electricity within the state of New York.
In the United Kingdom, the Royal Mail Group was a monopoly that has served as a British postal and courier service from as far back as 1516. Although the service is still in operation until now, it no longer enjoys a monopoly in the sector as other private postal and courier service providers now operate in the country.
In the technology sector, companies such as Microsoft and Alphabet have enjoyed an almost monopolistic position despite the presence of other competitors within the industry.
According to data from Statista, Microsft’s operating system for desktop computers has held a worldwide market share of between 90-72% between January 2013 to November 2023. Google has held a search traffic share of around 91.47 percent from January 2015 until January 2024.
An additional example of a monopolistic market structure exists in the sports industry, this can be seen in how player contracts in professional sports are often controlled by sports leagues or clubs. These leagues additionally have leases on large arenas and stadiums where sporting events occur.
Although several leagues may exist, very few have the finances to pay professional athletes and lease major arenas, thus these few enjoy certain perks in the industry such as being able to choose and work with top athletes.
Another example of a market that has a monopolistic structure can be found in the payment card sector, with a top contender being Visa. Although the brand does not issue prepaid, debit, or credit cards directly, it provides services in the sector to various organizations around the world.
Between 2007 to 2023, the brand held a market share of over 50% in the sector, making it one of the most used payment card service providers in the United States.
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Conclusion
The monopolist market structure is mostly found in the public utility sector as it presents a level of certainty to the populace and makes it easier for the government to track and monitor the effectiveness and operations of the monopolist.
This is necessary because when monopolists are left to operate unfettered, they may pursue personal gains and excess profit at the detriment of the consumers. Thus, leading to exploitation of consumers in the form of low-quality products or services, or exorbitant pricing.
As a means of curtailing the exploitation of consumers by monopolists, the United States has instituted antitrust laws that encourage competition by preventing mergers and acquisitions that may result in the formation of monopolies.
