Economics Essay Example | Topics and Well Written Essays - 2500 words

Economics - Essay Example A monopolist does not have to worry about any such retaliation due to imperfect competition. There are too many barriers of entry into a monopolistic market for new firms. The biggest barrier is that of economy. A monopolist is able to produce his product at a very low cost and it is not possible for the other producers to produce at such a low cost. The competitors are not able to invest in capital like the monopolist invests. The technology that is available to the monopolist is also not available to the competitors. Therefore, the monopolist lowers the price of his product at such a level at which other producers cannot survive. This way, the competitors are driven out of the competition. When this happens, the monopolist raises the price of his product at his desired level again. Another aspect of monopoly is the network effect. The product of the monopolist has no close substitutes. The new consumers also tend to use the monopolist’s product because it becomes a social no rm and a fashion. This is why the demand for his product is always likely to increase. This aspect also serves as a barrier of entry for new firms and as another incentive for monopolist to raise price. Patents and copyrights provide legal protection to a monopolist from competitors. Generally, a monopolist earns supernormal profit which means that the marginal revenue is lower than the price. The demand curve for the monopolist’s product is relatively inelastic. This means that any change in price does not affect the demand for the product. Monopoly is one of the rare scenarios in which the demand for the product is relatively inelastic. Normally, the price goes up in this case because it is very easy for the monopolist. In a competitive market, it is very hard to raise the price of the product because the competitors do not follow the new price. The demand for the product in perfect competition is perfectly elastic and there is no demand if a single firm raises its price. T here is no such case in monopoly. A monopolist has a great influence on the consumers. There are times when a monopolist has to face some retaliation from the consumers when he raises the price unreasonably. In order to deal with this situation, he uses his control on supply. He cuts the level of supply at his own will and it becomes hard for the consumers to get their hands on the monopolist’s product. When they do find the product, they are willing to pay the price asked by the monopolist. This way, the monopolist curbs the reaction of the public and earns real economic profit during the process. However, he does lose some of his customers in the process because the demand for his product is not perfectly elastic and some of the customers are no longer able to afford the product. His ability to control supply and affect the consumers is another barrier for his competitors. Another tactic for a monopolist to make high profit is price discrimination. He segregates the market into two parts. The consumers who need his product more or have an ability to pay more are charged high prices. The rest of the consumers are charged lower prices. Price discrimination works successfully and is profitable when the elasticity of demand of one market is different from that of the separated market. This way, the monopolist earns more profit from the market whose elasticity of de