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September 24, 2018 

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EXCESS DEMAND: A disequilibrium condition in a competitive market in which the quantity demanded is greater than the quantity supplied, hence there's "extra" demand. Pointy-headed economists generally use the more technical term shortage rather than excess demand. The reason, of course, is that shortage has two syllables and excess demand has four. The time saved in pronouncing two syllables rather than four is a definite efficiency plus for the entire economy.

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MONOPOLY, REALISM:

If taken to the extreme, monopoly, like perfect competition is an ideal market structure that does not actually exist in the real world. In the extreme, a "pure" monopoly is a market containing one and only ONE seller of good, a good with absolutely, positively no substitutes. The product is absolutely, certifiably unique. It not only has no CLOSE substitutes, it has NO substitutes. Period. End of story. In the real world, however, every product, no matter how unique it might appear to be, has substitutes. The substitutes might not be very close. They might be really, really bad substitutes. But they are substitutes. As such, there are no pure monopolies in the real world.
Monopoly market structures can be thought of in one of two ways. One is as an abstract, theoretical model of a market containing a single seller. The other is as a realistic market in which one firm more or less dominates the market. The real world does not contain any theoretical, abstract "pure" monopoly markets. Neither does the real world contain other representations of idealized abstractions, such as a "dimensionless point" or a "utility-maximizing consumer."

However, in the real world, which contains every color EXCEPT absolute black and absolute white, there are also varying shades of monopoly. Real world monopolies are not "pure." They are NOT absolutely the ONLY firm in a market. They do NOT produce a good that has absolutely NO substitutes. But some real world firms sort of, almost, kind of, come close to the theoretical ideal of monopoly.

Cable Television

Consider the provision of cable television as an example. Cable television providers are often given monopoly status by their local city governments. In other words, the company is the only one legally allowed to provide cable television to the residents of the town. Does cable television really fit the abstract, conceptual model of monopoly? Yes and no.

The key to monopoly rests with the number and closeness of available substitutes. Consider the hypothetical example 4M Cable Television Company operating in the hypothetical town of Shady Valley. While this example is hypothetical, it is representative of cable television services provided across the country.

While cable television is "unique," and if a company like 4M is given exclusive rights to provide cable television services it is considered a monopoly. But, substitutes DO exist. Network programming funneled through affiliates that broadcast through the airwaves offers a substitute for 4M's provision of cable television. Watching the Shady Valley Primadonnas baseball team play is a substitute. Viewing the exploits of Brace Brickhead at the Shady Valley Cineramaplex is a substitute. Reading a book, tending a garden, and even spending time clipping toenails are ALL substitutes for 4M cable television. None of these are perfect substitutes, none are great substitutes, but they ARE substitutes.

Public Utilities

Cable television shares many features of other services often referred to as public utilities. Public utilities provide electricity, natural gas, local telephone service, garbage collection, water distribution, and sewage disposal in virtually every city in the country. By and large, a single firm provides each utility service exclusively to a community--one electric company, one local telephone company, etc. Most of these are either government sanctioned monopolies or operated outright by the local government.

None of these are "pure" monopolies with absolutely, positively NO substitutes. But the available substitutes are NOT very close. Electricity is a substitute for natural gas, but they are not very close. The U.S. Postal Service (the mail) is a substitute for telephone, but it is not very close. Drilling a water well in the backyard is a substitute for city water distribution, but again, it is not quite the same. In fact, one reason public utilities are either government sanctioned monopolies or operated outright by the local government is that these products are unlike other goods.

Pharmaceuticals

A growing category of monopoly markets falls in the pharmaceutical industry, the provision of drugs and other medications. In some cases, a firm develops a drug that is unlike anything previously available. The drug treats an ailment that has never before been treated. Many drugs, however, are improved methods of treating an ailment. The previous method might not be as effective, but it does represent a substitute.

When aspirin (salicylic acid) was first discovered, it represented a quantum improvement in health care, relieving headaches, reducing inflamed muscles, and curing other ailments. While substitutes were not close, they did exist. A cold compress and a little rest might also cure a headache. Not quite the same as taking a couple of aspirin, but a remedy nonetheless.

Varying Degrees of Substitutes

While every good has some sort of substitutes available, some are close, other less so. Cake donuts and glazed donuts are close substitutes. Electricity and natural are not so close. Some substitutes are close enough to be considered as part of the same market. Other substitutes are different enough to be relegated to different markets. At some point, substitutes are so different that a good is considered "unique." If that good is supplied by a single firm, then a monopoly exists.

Is such a firm absolutely a monopoly? Probably not. Does it effectively operate like a monopoly? Probably so. If 4M Cable Television pays no heed to "substitutes" because customers are not inclined to switch from cable television to other goods in response to price changes, then 4M is a monopoly.

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Recommended Citation:

MONOPOLY, REALISM, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: September 24, 2018].


Check Out These Related Terms...

     | monopoly, demand | monopoly, efficiency | monopoly, sources | monopoly, problems | monopoly and perfect competition |


Or For A Little Background...

     | monopoly | competition | market control | market structures | monopoly, characteristics | substitute good | model | abstraction | fifth rule of imperfection |


And For Further Study...

     | monopoly, short-run production analysis | price discrimination | perfect competition | oligopoly | monopolistic competition | monopoly, marginal revenue and demand elasticity | cross elasticity of demand |


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