Question

The monopoly market structure is characterized by a single seller, selling a product with no close substitutes in a market where there is some sort of barrier to entry.

Evaluate the statement: A monopolist is a price-maker because this firm can charge whatever price it desires. What market conditions may challenge this statement?

Must be a thorough answer with at least 12 sentences.

Answer 1

A monopolist is a price maker as it is the sole producer of the good in a market which has a barrier to entry so the market demand curve becomes the supply curve of the firm.

It cannot charge any price it wants in the market because the demand curve it faces is downward sloping and a higher price will decrease demand and revenue, therefore, it would charge price where MR=MC for profit maximization.

The market conditions which may challenge this statement are:

-When the barriers to entry are removed or the market is regulated by the government.

When the barriers to entry are removed, more firms will enter the market in which case the supply will increase and the market becomes a competitive market where the firms become price takers instead of price makers. Also, when the government regulates the market, it will regulate the monopoly to produce at P=ATC in which case the market will produce an efficient quantity at a lower price so that it will break even.