What Are Monopoly Profits

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Monopoly profit is a special kind of economic benefit arising under monopoly. Such profit is due to the ability of a monopolist to restrict competition and affect the price of the product in its favor. There is a causal relationship, and a marked contrast between uncertainty on one hand, and monopoly, on the other, as sources of profit.

The causal relationship is manifested in the fact that the entrepreneur can reduce the uncertainty, or at least mitigate its impact by achieving monopoly power. Monopoly profit is called the profit above the average, usually under conditions of perfect monopoly, profit of a single firm surpasses the average on the market, as a result of their special position in the market.

The existence of a monopoly in one form or another is born out of the desire to amass obscene levels of profit. One of the conditions of monopoly profit is the firm’s ability to influence prices by setting them to maximum advantage. Thus riding on the market power brandished through price and other strategies.

A company which enjoys monopolistic power of setting prices, will normally be inclined to set hefty prices which constitute the maximum profit level. This means the most profitable price they are in a position of setting (otherwise known as the monopoly price) is bound to hover around the optimum output level, in which case marginal cost touches marginal revenue.

Under ordinary market conditions, such a price will still be greater than the marginal cost involved in production, showing that the consumer price is higher than the company’s marginal cost. Ordinarily, a company that introduces a new product would obtain a monopoly for some time.

In the event that consumers are amply aware of full information on market prices in relation to particular products offered by different companies, there cannot be a persistent monopolistic state of affairs. Although, barriers to entry effected by one or more of the market players can still be created in many ways.

For instance, patent rights can induce legal monopoly for the patent holder, and similarly when a particular raw material or natural resource under the full control by a single entity, this can simply translates to a natural monopoly.

The government for its part is able to control some of the monopolistic tendencies by companies by regulating issues around incremental cost. Essentially, it can curtail the activities by ensuring that prices charged do not exceed the incremental cost to thwart profiteering.

 

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