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Captive Market Definition
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.
A Little More on What is a Captive Market
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 market’s 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.
References for Captive Market
Academic Research for Captive Market
- Strategic segmentation of a market, Roy, S. (2000). International Journal of Industrial Organization, 18(8), 1279-1290. The paper states that when there aim at information from particular consumers through direct marketing activities by rival firms, there is a possibility of entire market division. The authors undertake an analysis of two-stage duopoly where, before price opposition, each institution aims at particular consumers and the only consumers informed purchase from the entity that has provided the information. In a state of balance, complete local monopoly develops; companies target and sell to mutually exclusive market divisions. When marketing cost move closer to zero, there is a reflection of relative production efficiency by market shares and is not applicable at high costs.
- DOES COPYRIGHT ENFORCEMENT ENCOURAGE PIRACY?*, Harbaugh, R., & Khemka, R. (2010). The Journal of Industrial Economics, 58(2), 306-323. The paper outlines the high-monopoly prices the copyright holder charges when the copyright execution is targeted to expensive purchasers such as corporate and government users. This motivates the low-value purchasers to shift to low quality pirated ones. The authors illustrate that extending the copyright holder captive market by more extensive copyright administration decreases the price towards a monopoly state which improves the sales of legal copies besides increasing excess to consumers.
- Price discrimination, competition and regulation, Armstrong, M., & Vickers, J. (1993). The Journal of Industrial Economics, 335-359. The paper performs an analysis of impacts of price discrimination policy in classical of a significant existing company faces the endogenous extent of competition in one of its two markets. Exploitative price policy in the various form of price administration is also studied. When the mean price of the occupant is controlled, there is a possibility of prices being lower than marginal cost with the possibility of anti-competitive impacts when price discrimination is allowed.
- Demarketing as a differentiation strategy, Gerstner, E., Hess, J., & Chu, W. (1993). Marketing Letters, 4(1), 49-57. The paper states that even though demarketing rejects consumers from purchasing, it may be a profitable choice when differentiation through product advancement is expensive. The differentiating demarketing influence on profit, market proportion, consumers and complete prosperity is put under investigation.
- A model in which an increase in the number of sellers leads to a higher price, Rosenthal, R. W. (1980). Econometrica: Journal of the Econometric Society, 1575-1579. This paper study price variation in the seller-buyer markets in which buyers with marginal demand interact with high proportionate of sellers and buyers and sellers bargain for the price after their meeting. There was a presentation of the application showing that; gradation of the model reproduces price variation acknowledged in eBay, price amount in eBay was to reduce significantly in counterfactual evaluation in the eBay network arrangements for the links to be drawn with equal chances of sellers and buyers.
- Captive supplies, market conduct, and the open-market price, Azzam, A. (1998). American Journal of Agricultural Economics, 80(1), 76-83. The author studies the structure of price-captive supplies association to evaluate whether some explanation existing in empirical works are justifiable. The major result was that despite the empirical association between the captive supplies and price obtained by independent producers is negative, it might or not be credited to a non-competitive manner. Therefore for the econometric model for perceiving the conducting type reflected by the association, there is a need for more structural information that whatever is in the literature.
- Rescuing the captive [mode] user: an alternative approach to transport market segmentation, Jacques, C., Manaugh, K., & El-Geneidy, A. M. (2013). Transportation, 40(3), 625-645. The paper states that the existing method of transporting the market division that describes two distinct groups of captive and choice users has been put into wide use by professionals and scholars regardless of the vagueness related with these terms. The factors majorly put into considerations of the final grouping examination are the extent of trip satisfaction and sensibleness. It is believed that the division method and the proposed policy framework would motivate an optimum between experimental and idealistic objectives in transportation policy.
- Captive supplies and the cash market price: A spatial markets approach, Zhang, M., & Sexton, R. J. (2000). Journal of Agricultural and Resource Economics, 88-108. Selective contracts between processors and farmers are in the progressively significant characteristic of contemporary agriculture. The authors examined on exciting experimental regulatory taking place in markets that show both contract and spot interchange In this circumstance captive supplies are represented by geographical barriers that limit the competition among the processors. When spatial dimensions are less important, captive supply is unproductive as barriers to competition due to the firm’s incentive to jump across a captive supply region to purchase the product.
- Vertical integration and market foreclosure: The case of cement and concrete, Allen, B. T. (1971). The Journal of Law and Economics, 14(1), 251-274. The paper illustrates the huge movements that happened in many markets resulting in all executives’ remarks focusing on the fact that companies had been driven to purchasing their customers likewise their competitors. The author states that vertical integration in their industry has progressed in the past years. However, if their position in the industry is put in threat as a consequence of corporate patterns, there is no alternative despite taking similar steps. The evidence is also shown of the cement firms that dropped out of the market after the purchase of a large customer by rival cement manufacturers.
- Serving the poor: captive market CSR and repurchase intention, Jose, S., Khare, N., & Buchanan, F. R. (2015). International Journal of Bank Marketing, 33(3), 316-329. This paper undertakes an examination on whether corporate social responsibility activities of a company influence poor captives’ consumer procurement plans. The findings were that besides the normalcy of other things, corporate social responsibility targeting borrowers communities influence buying intents positively including poor captive borrowers. Besides, favourable view at corporate social responsibility to some degree reduces the negative influence of dissatisfaction on rebuying intents. Microfinance point makes it more so the borrower is both a client and recipient of CSR. This suggests that similar to wealthy customers, poor and captive customers care about CSR and dissatisfaction.
- Information and monopolistic competition, Salop, S. (1976). The American Economic Review, 66(2), 240-245. The paper outlines the market power both in the short and long run that organizations gains from the presence of imperfect information. Also, expensive information collection results to equilibrium in which small-sized firms charge monopolistic price instead of competitive price. The appropriate market arrangements with imperfect information are not the perfect competition but instead is monopolistic competition.
- Captive supplies and the spot market price of fed cattle: The plant‐level relationship, Schroeter, J. R., & Azzam, A. (2003). Agribusiness: An International Journal, 19(4), 489-504. The paper examines the association at plant level but using extensive information set on the cattle purchasing undertakings in four large packing plants in Texas Panhandle for the period covering 1995 to mid-1996. The authors found evidence to back the postulate that plants that expect near-terms future supplies of captive supply cattle that are expensive compared to their regional market competitors’ degrees of dependence on captive supplies tend to pay sport market prices that are less than the average. The impact which is statistically important is reasonably small degree.