Monopolistic

Monopolistic refers to an economic term defining a practice where a specific product or service is provided by only one entity. Hence the entity supplying the product or service has the dominance in its price-fixing and deciding on the market output.

In economics, monopolistic competition occurs when several firms offer products or services with similar basic functionality, but they are unique in their own way. Whereas a monopolistic market exhibits a single entity’s domination in supplying a product and service to the market, it implies a pure monopoly.

• Monopolistic economy refers to the practice in which an entity possesses the exclusive advantage of controlling the output and price of a product or service offered by them. It is because they are the sole producers of that particular product or service.
• A monopolistic market exhibits a market in which only one entity engages in producing and supplying the product or service.
• Monopolistic competition describes the scenario where an industry contains many producers and consumers enjoying few barriers to entry and exit.

The monopolistic competition reflects a few features of monopoly and perfect competition. For example, the producers are price takers like monopoly players and comprise many suppliers, availability of substitute products, free entry, and exit as in perfect competition. At the same time, a monopolistic market represents an example of a pure monopoly like enjoying full market share and control due to lack of competition. Thereby utilizing the chance to impose high prices. 

As the only player in the market with a monopolistic structure, such firms can tweak various elements to produce maximum profits. A monopolist also has the leverage to demand lower prices for input products from suppliers. Hence increasing the profits at the expense of input suppliers and quality. 

In the short run, monopolistic competition exhibits firms earning economic or supernormal profit by producing quantity (Q) where marginal revenue (MR) is equal to marginal cost (MC). The total profit in this scenario will be equal to the product of quantity (Q) and the difference between average revenue (AR) and average cost (AC). AR curve also represents the downward sloping demand curve resembling the monopoly feature. Whereas, in the long run, when new participants enter the market, the demand decreases, and the demand curve (D=AR) and MR curve shift to the left, revealing the decrease in sales leading to normal or reduced profit.

Countries like the United States and China have antitrust laws, making it unlawful for firms to manage their operations to become a monopoly. They also describe unfair practices in business and penalize entities exercising and benefitting from such practices. However, there are examples of monopolists in US history and even currently. A prominent example of such a monopolist is John D. Rockefeller. It is also an example of an entity forced to break up its company to stop breaching antitrust laws.

One of the richest Americans of all time, Rockefeller owed his success to oil prospecting by starting the Standard Oil Company in 1870. It became a large conglomerate and became the prime oil supplier in the United States with time. The company controlled ninety percent of oil production in the United States during the 19th century.

The company engaged in acquisitions, horizontal and vertical integration, along price lowering practices to depress the competitors. Hence the company reflected monopolistic behavior. In 1882 they combined their businesses under trust as a reaction towards state laws limiting company activities. By 1892 antitrust legislation resulted in the dissolution of trust and initiation of ending their oil monopoly. By 1911, under Sherman Antitrust Act, the entity was also split into 34 companies, and these companies now form part of the core of the United States oil industry.

There are a lot of examples of monopolistic competition. It includes industries where it is easy for a new entrant to establish their business, exploring non-price competition opportunities and at the same time confronting less pricing power like the hospitality industry, fashion and apparel, confectionery industry, and consumer electronics.

In a monopolistic market, the entity enjoying dominance earns profits year after year without doing anything significant. Since the firms are under no pressure from the competition, they may be sluggish to evolve and innovate but still make a profit. Consumers have no alternatives available, and firms are not motivated by any incentive to follow incessant product improvisation. Even if the scenario includes few companies compared to one in pure monopoly, they still enjoy significant market share and little competition.

Many firms producing differentiated products and free entry and exit of participants causing downward sloping demand curve and insignificant profit figure demonstrate the characteristics of monopolistic competition. A large number of firms together serve a large customer base. They enhance their profit by creatively differentiating and delivering better products at a lower price. In addition, they spend a considerable amount on public relations and advertising to compete with other market players.

This has been a guide to Monopolistic and its meaning. Here we explain how a monopolistic economy works along with an example and its characteristics. You can learn more about financing from the following articles –

• Monopolistic Competition Examples
• Monopoly Examples
• Monopoly vs Oligopoly