“Having pure monopoly power guarantees economic profits.” Discuss in several sentences whether or not this is...

“Having pure monopoly power guarantees economic profits.” Discuss in several sentences whether or not this is a valid statement.

Expert Solution

This statement is not always valid. A pure monopolist has a higher probability of earning economic profits however the monopoly position does not guarantee profits. The pure monopoly is not beneficial and does not guarantee the economic profits. In the long run, the company holding the monopolistic position in the market can deteriorate its performance due to it's relatively secure position. Consequently the product's quality may decrease substantially, while the pursuit of profits can increase the prices exorbitantly high. As a result the customers will suffer from the price rise for the lower quality of products which naturally raises the strong desire to search a substitute for the product they buy from the company. Furthermore pure monopolist tends to bureaucratization and ineffective usage of available material and financial resources. It may create the internal conflicts and stimulate the further increase of prices that may confront the dissatisfaction among customers. In such a situation, profits of the company may fall and thus pure monopoly power will not guarantee economic profits

Rahul Sunny answered 2 years ago

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