The monopolist cannot directly control the price because the amount which he can sell at a particular price depends on the market demand schedule. The monopolist has little control over demand. He has control only over supply.
A monopolist thus adjusts the supply to that level which will maximise his net revenue. The monopolist considers two other factors in fixing prices—elasticity of demand and the cost conditions.
If demand is elastic, rising prices will reduce sale. But if demand is inelastic, prices might be raised to some extent without reducing the sale much. The monopolist will also take into consideration the cost conditions of the commodity.
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If the commodity obeys diminishing returns, reduction of output will reduce MC and may increase monopoly revenue. If the commodity obeys increasing returns, expansion of output will reduce MC and may increase monopoly revenue.
It is generally assumed that as the monopolist has complete control over supply, he can charge any price he likes.
But in real, life this is not true. Absolute monopoly is rarely found. There are always some restraints on the power of the monopolist which explain the fact that a monopolist cannot charge a very high price.
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Though the monopolist tries to secure maximum benefit, in practice he gets what Marshall called a ‘compromise benefit’. The degree of monopoly power depends upon the gap between the MC and price. The following factors reduce the gap between MC and price.
First, if the demand is elastic, the monopolist cannot charge a very high price for his product because high price will reduce consumption greatly. But if demand is inelastic prices might be raised considerably without reducing consumption much.
The more elastic the demand, the less will be difference between price and MR and output produced by a monopolist will be nearer to that under perfect competition.
In the case of commodities with highly inelastic demand the monopolist may even destroy a part of the supply in order to obtain higher total revenue. Secondly, there is the threat of potential competition, both domestic and foreign.
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Only in rare cases, new entry is completely barred. Patents, copyrights and government monopolies are the only cases where new competitors cannot enter. In other cases, if a monopolist charges a very high price, new firms will be tempted to enter into the business. Thirdly, practically every commodity has substitutes.
If the monopolist charges too high a price, it may encourage research and use of substitutes. Synthetic rubber has completely supplanted natural rubber. Artificial indigo dye has completely supplanted natural product.
Research is being conducted for discovering good substitutes for jute. Fourthly, there is the risk of state intervention and state control. If the monopolist charges a very high price, there will be great discontent among the public and then the government will be forced to interfere into the affair and take over.
Lastly, in the case of public utility services like electric power supply, the government through legislation limits the price which can be charged.