What Is a Captive Market?

Captive markets are any types of market situation in which consumers have limited options when it comes to the purchase of goods and services. There are many different reasons why a captive market may develop, including only a small number of companies producing the goods and services involved, a market that is controlled by a monopoly, or even some aspect of the product involved that is so unique that it can only be obtained from one or two suppliers. While not necessarily a negative situation, being a member of captive audience within a captive market does involve a few risks that are not found in more open and versatile types of marketplaces.

One of the more common examples of a captive market has to do with a situation in which there is a sole provider meeting the needs of all the consumers in a given market. For example, if there is only one provider for electrical service within a given area, then a monopoly exists and consumers have no choice but to remain customers of that one provider. In like manner, if certain goods and services are only available from a state owned and operated institution, consumers have no real choice if they wish to make use of the products sold by that institution.

A similar type of captive market is known as an oligopoly. In this scenario, the marketplace is dominated by a small number of companies and room for competition by other companies is significantly limited. This means this small group of companies more or less control pricing and supply, with consumers having few alternatives to secure products from anyone other than that group of businesses.

At times, a captive market is created by a manufacturer constructing goods in such a way that consumers have to keep coming back for replacement parts that are unique to those products. For example, if a textile firm purchases machinery for use in production, and the components of those machines are only manufactured by the same company that made the machines, there is no option to buy them from anyone else. The end result is a situation in which the customer must agree to pay whatever price the manufacturer charges, or run the risk of losing the entire investment in the machinery.

In some cases, the captive market is created when a parent company requires that all its satellite companies purchase products from the parent. This means that if a teleconference bureau is owned by a business that manufactures conference bridges, the bureau has no real choice but to purchase the bridging equipment from the parent, even if bridges made by other manufacturers would be more cost-effective. This approach helps to keep the bottom line of the parent healthy, although possibly at the expense of the profitability of the satellite company.