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 following strategies 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 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 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.
Factors Influence Monopoly Pricing:
The monopolist cannot charge very high price for his product due to the following factors:
(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 above, it can be concluded that the monopoly price is not fixed arbitrarily but is influenced by many factors as stated above.