What is a Captive Market?

A captive market is one in which there are suppliers who control the supply of specific goods. This scenario results in high demand for the little supply available. Consumers do not have a choice but to buy the presented supply. This leads to higher prices with limited diversification for consumers.

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Why is a Captive Market Important?

Global economy is comprised of different types of markets such as; the perfectly competitive market for sectors like retail, fruits, and vegetable; and oligopoly market like in telecommunication industry; monopoly market in which only one seller is permitted to sell the specific product in the economy. In case of this type of market prices are set by the producers, and the buyer's purchases do not have alternative sources hence must buy from the single seller. The market is characterised by restrictions to entry to other firms and the absence of competition. The sellers in the monopoly market include automobile companies consisting of Mercedes, BMW and others. Captive market shares some similarities with monopoly market, and it has an amazing characteristic in that despite the absence of natural monopoly, consumers have very limited choices and resulting to buying products from only one seller hence creating an artificial monopoly. Products that are common in the normal market and can be purchased in the competitive environment are sold by very few sellers in a particular area. The fewer sellers do not compete, and the monopoly authority of sellers in setting prices is achieved. This result to captive markets prices is very exploitative even for products that are available at lower prices in the competitive markets. Consumers in captive markets are attracted by few sellers, and they are forced to either purchase the desired product from only one sell or avoid the purchase. Similar to monopoly market, Captive market has restricted entry. The most significant characteristic of a captive market is that buyers do not have a chance of negotiating the price set by the sellers and taking the seller determined price is not an option to them even though there is a possibility of purchasing from other places by unshakable negotiations. The best case is of bags in footpath versus bags with a brand name in shopping malls. There are many justifications for the existence of captive markets including supply inadequacy. For instance, when there is less production of vegetables like potatoes and onions, supply decreases will demand increases leading to prices skyrocketing. Similarly, Rotting of products in cold storage results to same price behaviour

Examples of Captive Market

• Suppliers of custom or unique clothing for events, such as uniforms, parades, or performances.
• Petroleum products are part of a captive market in many areas of the world.
• Television and internet providers are very limited in rural areas, thus resulting in a captive market situation.
• Eating establishments in airports are a highly capitve market.

Related Topics

• Perfect Competition
• Market Power
• Price Takers
• Price Makers (Pricing Power)

• X-Efficiency
• Captive Market
• Contestable Market Theory
• Herfindahl-Hirschman Index
• Concentration Ratio