Can a Monopolist Set any Price he Likes?

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We know that if a firm can alter the price of the product he enjoys some sort of monopoly power. In other words, being a ‘price-maker’, it is said that a monopolist can arbitrarily alter the price of the product. Rather, people say that a monopolist is whimsical as far as price determination is concerned. Truly speaking, no such arbitrary monopoly power exists.

For example, as far as this book is concerned, the publisher of this book—New Central Book Agency (P) Ltd—owns ‘Publication, Distribution and Promotion Rights’ and thus enjoys monopoly power. It can thus sell this book at a price, say, Rs. 500 per copy. It does not do so as this will discourage buyers to buy. Consequently, profit will drop. Thus to maximize profit a monopolist cannot charge any price whatever he likes.

Major reasons are:

Firstly, though there are legal barriers to entry, potential competitors in the long run may emerge if a monopolist goes on increasing the price of his product. As this potential ‘threat’ exists, the monopolist may be hesitant in raising the price of the product arbitrarily.

Secondly, monopoly refers to a market situation where there is no close substitute of the monopoly product. But, in reality, imperfect substitutes exist. We know that the CESC enjoys monopoly power as far as the supply of electricity in Kolkata is concerned.

If it thinks it wise to raise the price of electricity, people may switch to other similar products as candles or kerosene lamps or generators. For fear of losing the market, a monopolist may be deterred in raising price indiscriminately.

Thirdly, governmental intervention or regulation in the form of taxes or in the form of laws may discourage the monopolist to increase price according to his discretion. CESC is not allowed to raise the electricity consumption rate without the prior permission of the Government of West Bengal.

Fourthly, trade union often intervenes in the functioning of business. A monopoly firm may be forced not to raise the price of the product due to trade union pressure.

Finally, public opinion has a great influence in price setting. Anti-monopoly stance of the public has a dampening effect on the arbitrary price determination of a product by a monopolist.

Thus, a monopolist has the power to change the price of the product but with caution. He does not enjoy arbitrary power in price determination.