What is monopoly of demand?

According to theinternetfaqs, the demand monopoly is a market form and at the same time a variant of the monopoly. In the case of a monopoly of demand, several suppliers face a single customer.

In this lesson, we explain the most important features of the demand monopoly, the behavior of the individual market participants and, using a few examples, the situations that result from it. At the end of the lesson, we provide you with a few practice questions that you can use to check your knowledge.

Synonym: monopsony

Why should you know the monopoly of demand?

Even if the monopoly of demand in its pure form is very rare in reality, it is advantageous to deal with the mechanisms on which it is based. In practice there are always situations that come close to a monopoly of demand, for example when the state is the only customer.

Features of the demand monopoly

In addition to the supply monopoly and the bilateral monopoly, the demand monopoly is one of three types of monopoly. With the demand monopoly, there are many suppliers, but only one customer. This enquirer is also known as a monopsonist.

This situation is rarely found in practice, but it is possible with restrictions. With this type of monopoly, the customer has greater market power, as he can choose between the various providers and pick the best offer. The providers, on the other hand, have no alternative and have to adapt accordingly.

monopoly of demand

The demand monopoly indirectly determines the price through the quantity of goods in demand. It is true that he can not directly influence the price of a good, which is dependent on the supply function, and its quality. However, he will always choose the amount demanded in such a way that he can maximize his economic benefit. A variant of the demand monopoly is the restricted monopsony. Here only a few providers face a single customer.

Demand monopoly: Many suppliers – one customer

Examples: Demand monopolies in practice

As already mentioned at the beginning, demand monopolies rarely appear in practice.

Example

A prime example here is the state, which acts as a customer for products or services that only it needs. For example, he appears on the labor market as a monopoly of demand, since no one except him has positions corresponding to certain professions, such as B. can offer that of the federal police officer.

In the armaments industry, too, the state can, at least in theory, be the only customer, provided armaments companies are prohibited from exporting certain products. Typically, this example is a limited demand monopoly because there are only a few arms companies. It would also be a prerequisite that this situation would take place in a closed economy, which in turn only exists in theory.

 

About the author