Misconceptions Concerning Monopoly Pricing:
A
question can be asked; can a
monopolist charge very high price for his product?
The answer to this question is not a difficult one; When a monopolist has to
determine the price of his product, he has two options before him. He may either
fix the price of the commodity arbitrarily and put it in the market for sale or
he may place the output in the market and allow the price to be determined by
the conditions of demand and supply. The monopolist will adopt that course which
gives him the maximum net profits.
If the
demand for the product of a monopolist is less elastic, then he is in a happy
position, and can fix a higher price than what he can get in a competitive
market. In case, the demand for his product is more elastic, then it is in the
interest of the monopolist to charge lower price and increase his sale.
On the
side of supply, if the product of a monopolist is subject to law of increasing
returns, then he can push his sale by lowering the price. If the commodity is
subject to law of diminishing returns, then he should restrict the output and
fix a higher price for his output. The monopolist cannot charge very high price
for his product due to the following reasons:
(i)
Entry of new firms. If a monopolist charges high price
for his product, the new firms, lured
by higher profits will creep into the field and the very position of the
monopolist will then be in danger.
(ii)
Availability of substitutes.
There are a very few Commodities in the
world for which substitutes are not available. If the monopolist charges higher
price, the consumers will take to its substitutes. The monopolist, being afraid
of the use of substitutes fixes a reasonable price of his product.
(iii)
Fear of state intervention. The
price fixed by monopolist for the commodities
may also be not very high due to the fear of state intervention. The state, in
the interest of the consumers, may fix a maximum price for the product of the
monopolist or may undertake to supply the commodity itself. The fear of state
intervention forces the monopolist not to charge very high price for the
product.
(iv)
Fear of boycott by the
consumers. Another consideration for the
monopolist to keep the price reasonable is the fear of boycott on the part of
purchasers for his product.
(v)
Price elasticity of demand.
Finally, the monopoly price is to a great
extent determined by the conditions of demand and supply prevailing at that
time.
From all
that we have said above, it can be concluded that the monopoly price is not
fixed arbitrarily but is influenced by many factors as stated above.
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