Monopoly Power Case Study

858 Words 4 Pages
I agree with the suggested answer, as for a business person monopoly power is an opportunity for him/her to maximize their profit in their business because there are no close substitutes, no rivals, and barriers to entry prevent other firms, all this will help the firm to earn positive profit an average rate of return for a relatively long time. Here the demand is inelastic to price which means demand will not change much even if we change the price, all these reasons are prefect for a businessman but the economist view monopoly power as a negative light and as an inefficient market. This is because they set prices at maximum profitable rate so the customers need to pay high price, also in monopoly they can even rise the price by reducing …show more content…
For example, if one firm is reducing their price lower than other, then there will be a flow of customers from other firms to this firm, in order to prevent this other firms also use this price reduction strategy to keep their customer. Like this each firm will continue competitive with each other to win the market leadership and this will cause the rivalry between firms. And if each firms are equally balanced then the rivalry between them will be very …show more content…
The customers always go for better product, service and lower price. So in order to switch customers from other firms to their firms, there will be intense competition between firms.
1. In the first case the value increases but price does not; consumer surplus increases but not profit. Here the consumer surplus increase but price does not increase which mean the firm does not earn any profit by increasing the value here and company’s performance is not increased.
2. In the second case the value increases, price increases and cost increases all by the same amount– no change to profit. Here both the price and cost are increased in the same way so there is no change in profit. In this case also the company is not earning any profit and not increasing the company’s performance by increasing the value.
3. In the third case the value increases, price increases but cost increase is greater than price increase; profit is reduced. Here both the price and the cost are increased but the cost gets higher than the price which decreases the profit of the company. In this case company’s profit and the performance are reduced when they increased the

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