Captive market – definition and meaning
A captive market is one where the potential buyers have very limited choice. In other words, unless they buy from just one or two suppliers their only other option is not to buy.
In this type of market, the seller has the upper hand. The seller can raise prices without worrying about competitors grabbing its customers.
Captive market on cruise ships
For example, a shop on a cruise ship has no competition. However, passengers still need to buy painkillers, toothpaste, diapers (UK: nappies) for their babies, and other basic items.
If there is only one shop on the liner, consumers have no choice but to get all their supplies from there.
If you want to eat and drink at the movies, you have to buy their products. Sports stadiums and airports also have this regulation. They do not let you consume things that you bought outside.
To be fair, sellers at movie theaters and cruise ships have to compete with sellers in other movie theaters and ships. However, while the passengers are on board and movie viewers are at the theater, they are are ‘captive.’
Captive market – monopolies
In some countries, where there is just one supplier of a product or service, there is a captive market. In Mexico, for example, you can only fill your car with gas (UK: petrol) from a PEMEX filling station.
We call a market with just one seller a monopoly.
According to Collins English Dictionary, a captive market is:
“A group of consumers who are obliged through lack of choice to buy a particular product, thus giving the supplier a monopoly.”
Many makers of printing machines have a captive market for toner sales. When you buy the printer, you soon realize that you are stuck with one supplier for your toner.
You cannot buy other toner brands because they do not work on your device. You have become the victim of a monopoly.
A captive market is an example of imperfect competition. Imperfect competition exists in a competitive market where some features are not truly competitive.
There are many possible types of imperfect markets such as a monopoly (just one seller), oligopoly (too few sellers), monopsony (just one buyer), or oligopsony too few buyers.
The market for printer toner
Many companies sell devices and subsequently their spare parts or peripherals. The main device is usually cheap, but the follow-up products are expensive. This is because they have a captive market.
In some franchise businesses, the franchisees can only buy supplies from the franchisor.
Captive market – airport shops
Critics accuse British airport shops of abusing their captive market advantage. They ask passengers for their boarding passes.
They subsequently claim back the VAT on products purchased by people traveling to outside the European Union. VAT stands for Value Added Tax, a type of sales tax.
Critics say that airport shops should pass on those savings to shoppers, instead of pocketing the money.