Competitive vs Monopolistic Markets

In Short

A competitive market has many companies within it, with the price charged equal to the marginal cost. A monopolistic market has one company in it, with the price above its marginal cost.

Competitive Market

The whole idea of competition is having alternative choices. If company A does something bad than people switch to company B. Let’s take the widget selling industry. Within this industry there are 1000 different companies. In order for one of the companies to grab more customers and thus profit they must lower the price and/or improve the quality of the widget produced. They will lower the price down to their marginal cost, which is how much it costs them to make the widget. They won’t lower it past there as they don’t want to lose money for every widget sold.

Monopolistic Market

In contrast with a competitive market, in a monopoly there are no alternative choices. If you don’t want to buy the item from company A, you will have to go without, which is sometimes not at all a desirable choice. Without the potential consequence of a competitor undercutting their price they can keep their prices high. Without the potential consequence of a competitor producing a higher quality product they can keep the quality of their product low. Profits in a monopolistic market are thereby much higher.

The Disadvantage and Advantage of Monopoly

The disadvantage of monopoly is that it leads to higher priced and/or lower quality products. The advantage is the higher profits incentivize people to innovate initially to establish the monopoly. The classic example is patents. A patent is in essence a government created monopoly. The inventor of an item or idea is the only one who can use or profit from an idea for a period of time. The disadvantage of patents is that the price is much higher. The HIV/AIDS drug Combivir is $12.50 per pill in the USA (where the patent is recognized), it’s 50 cents per pills in India (where the patent is not recognized). The advantage is that more people will try to invent something new. Without the promise of huge profits, many companies would not go through all the work and R/D of developing new pharmaceutical drugs. It wouldn’t be financially worth their time.

Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. Please contact me if you want me to write about a particular topic. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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