Monopoly price

[1][2] A monopoly occurs when a firm lacks any viable competition and is the sole producer of the industry's product.

[1][2] Because a monopoly faces no competition, it has absolute market power and can set a price above the firm's marginal cost.

[1] As the sole supplier of the product within the market, its sales establish the entire industry's supply within the market, and the monopoly's production and sales decisions can establish a single price for the industry without any influence from competing firms.

[1][2][3] The monopoly always considers the demand for its product as it considers what price is appropriate, such that it chooses a production supply and price combination that ensures a maximum economic profit,[1][2] which is determined by ensuring that the marginal cost (determined by the firm's technical limitations that form its cost structure) is the same as the marginal revenue (MR) (as determined by the impact a change in the price of the product will impact the quantity demanded) at the quantity it decides to sell.

[1] Although the term markup is sometimes used in economics to refer to the difference between a monopoly price and the monopoly's MC,[6] it is frequently used in American accounting and finance to define the difference between the price of the product and its per unit accounting cost.

Accepted neo-classical micro-economic theory indicates the American accounting and finance definition of markup, as it exists in most competitive markets, ensures an accounting profit that is just enough to solely compensate the equity owners of a competitive firm within a competitive market for the economic cost (opportunity cost) they must bear if they hold on to the firm's equity.

[3] The economic cost of holding onto equity at its present value is the opportunity cost the investor must bear when giving up the interest earnings on debt of similar present value (they hold onto equity instead of the debt).

[3] Economists would indicate that a markup rule on economic cost used by a monopoly to set a monopoly price that will maximize its profit is excessive markup that leads to inefficiencies within an economic system.

Thus the monopolistic firm chooses the quantity at which the demand price satisfies this rule.

On the other hand, a competitive firm by definition faces a perfectly elastic demand,

The rule also implies that, absent menu costs, a monopolistic firm will never choose a point on the inelastic portion of its demand curve.

For an equilibrium to exist in a monopoly or in an oligopoly market, the price elasticity of demand must be less than negative one (

[4] The mathematical profit maximization conditions ("first order conditions") ensure the price elasticity of demand must be less than negative one,[2][7] since no rational firm that attempts to maximize its profit would incur additional cost (a positive marginal cost) in order to reduce revenue (when MR < 0).

In the case of price elasticity of demand, it also called Lerner index.

means the marginal cost of production The Lerner index measures the level of market power and monopoly power that a firm owned.The higher Lerner index indicated the more monopoly power allows a company have chance to establish prices that are higher than their marginal costs and then lead a higher monopoly price.

In order to ensure a maximum economic return, the monopoly price is established at the point where marginal revenue equals marginal cost based on the firm's evaluation of the demand for its product.

In addition, monopoly price will prevent new business from entering the market and restrict innovation.

A monopoly would not like to invest more on research and development or innovation due to it already has a captive market.

Then the lack of innovation may block market competition and limit the industry’s growth potential in long run.

The monopoly’s entrance restrictions also make it difficult for new businesses to enter the market, which reduces the scope for innovation and new ideas.

In sum up, monopoly pricing generally has negative consequences on consumers and the overall economy, resulting in higher costs, lower quantity desired, inefficiencies and a lack of innovation.

The loss in both surplus' are deemed allocatively inefficient and not socially optimal.

In contrast, when the firm has more information and discrimination is present, monopoly pricing becomes increasingly efficient as it approaches perfect discrimination through the various forms of price discrimination: Much of the empirical literature suggest that setting a dynamic or variable monopoly price is market-efficient and can maximize total profits for the firm.

A paper written by Harris and Raviv [9] advise firms who are restricted by productive capacity to set their prices on a priority-basis.

If production capacity is capped and not only restricted, Harris and Raviv suggest pricing goods in an auction format to be optimal for maximizing profits.

Further studies by Rajan et al. (1993)[10] have also concluded that a variable pricing scheme to be optimal for maximizing profits.

Additionally, He suggests goods that drop in value or decay should lead to a decrease in price as demand for said goods also decrease therefore the firm should drop the price as to maximize profits again and reclaim lost producer surplus.

[12] Market power is the firm's ability to affect terms and conditions of exchange.

[13] A monopoly possesses a substantial amount of market power, however, it is not unlimited.

[14] The firm in monopoly is the market as it sets its price based on their circumstances of what best suits them.