8 Limits to the Power of a Monopolist | Monopoly

The following points highlight the eight limits to the power of a monopolist.

The limits are: 1. New Entry of Competitors 2. Fear of Substitutes 3. Fear of Public Reactions 4. Fear of Governmental Regulations 5. Consumer’s Surplus of the Commodity 6. Because of the Countervailing Power 7. Fear of Nationalisation 8. Differences in the Elasticities of Demand.

Power of a Monopolist # 1. New Entry of Competitors:

New entry of businessmen in the market is rarely barred.

Patents, copyrights and government monopolies are possibly the only cases where new competitors cannot come.

In other case possibility of competition exists and very high prices will attract new-comers into the field. If dynamic entrepreneurs enter into a monopolized industry, competition may be restored.

Power of a Monopolist # 2. Fear of Substitutes:

Every commodity has a substitute. The monopolist can maintain his position only so long as the substitute of the monopolized commodity is much less satisfactory. But if the monopoly price will be too or very high people will begin to use less satisfactory substitutes. The monopolist, therefore, charges less than the maximum possible price.

Power of a Monopolist # 3. Fear of Public Reactions:

In democratic countries public reaction is always an important factor. Extortionate prices may compel the public to take retaliatory action, e.g., to boycott the goods or induce the government to control the Monopoly by law or nationalize it. Now-a-days monopolistic take steps to keep the public satisfied. The best way of doing so is to charge fair prices. Consumer’s resistance may reduce the price.

Power of a Monopolist # 4. Fear of Governmental Regulations:

In the case of Public Utility Commodities like gas or electricity supply, the Government by law limits the prices which can be charged.

Power of a Monopolist # 5. Consumer’s Surplus of the Commodity:

The monopolist must consider the consumer’s surplus obtained from the commodity. The monopolist cannot fix his price above to consumer’s surplus.

Power of a Monopolist # 6. Because of the Countervailing Power:

The monopolist buys raw-materials etc. from other producers. The monopolist pays wages to their workers. It is found that the power of the monopolist is curtailed by the power of the suppliers of goods and of trade unions. This is called Countervailing Power.

Power of a Monopolist # 7. Fear of Nationalisation:

The monopolist is well aware that charging usually high prices would attract the attention of government. If the product which the monopolist is producing is of public utility, then there is every likelihood of the states taken over the monopoly organisation in public interest. This fear may prevent the monopolist from charging high prices.

Power of a Monopolist # 8. Differences in the Elasticities of Demand:

The differences in the short-run and long-run elasticities of demand for the Monopoly product also affect the Monopoly price. In short period, the monopolist can change higher prices because the consumer’s take time to adjust their habits, tastes and income to some other substitutes and accordingly the demand is less elastic. But in the long period emergence of substitutes and change in tastes etc. may bring inelastic demand to more elastic. The monopolist may sell more at lower prices.

Further economists like Prof. G. L. Bach and Robert Triffins have observed that:

“The monopolist faces two limiting factors—first even a Monopolist faces a downward sloping demand curve reflecting basically the fact that every product has some substitutes if its price becomes high enough. Second the larger the profits become the greater will be the incentive for new firms to enter, even though the cost may be high and risks may be there.”