The following points highlight the seven limitations of price-fixing power of a monopolist. The limitations are: 1. Potential Competition 2. Foreign Competitors 3. Existence of Substitutes 4. Fear of Public Agitation or Consumer’s Opposition 5. Government’s Interference and Legislations 6. Time Elasticity and Future Expansion of the Business and few Others.
Limitation # 1. Potential Competition:
The monopolist may fear potential competitors. The monopolist at present may not have any competitors; but, if he consistently charges high prices for his product, the new competitors may emerge to throw a challenge and ultimately may succeed in break his monopoly position. For this reason he is often afraid to charge high price for his product although he is always left with this option.
Limitation # 2. Foreign Competitors:
A monopolist is also afraid of foreign competitors; the charging of exorbitant prices may attract the foreign firms, called multinational corporations to enter the monopolist’s sheltered (and often well-protected) local market.
Limitation # 3. Existence of Substitutes:
In theory, the product of the monopolist cannot have any substitutes; but in reality every product has more or less some substitutes, in the long run at least. For this reason a monopolist cannot charge any price he likes. If he charges higher price, consumer may begin to find out and buy substitute items (whether close or not).
Limitation # 4. Fear of Public Agitation or Consumer’s Opposition:
ADVERTISEMENTS:
There is also the fear of public agitation. High prices and huge profit may provoke adverse comments from newspapers, may raise protests from consumers and may stir unrest among the employees who will demand a share in the monopolist’s excessive profits. Now a days, more consumers are very alert and often resist the high price policy of the monopolist and may even boycott the monopolist’s product.
Limitation # 5. Government’s Interference and Legislations:
A monopolist is also afraid of the interference of the government which may object to the policy of high price and excessive profit of the monopolist. Even the government may make appropriate legislations (e.g., the Monopolies and Restrictive Trade Practices Act. 1969, in India) to curb the abuse of monopoly power.
Limitation # 6. Time Elasticity and Future Expansion of the Business:
Another restraining influence lies in the difference in the elasticity of demand between the long run and the short run. In the long run the demand for the product of the monopolist can be more elastic than in the short run. If the price is raised to a high level, the consumer may gradually find a suitable substitute.
But if the price is lowered, more people will use the product with the passage of time and sales level may gradually rest. The monopolist may, therefore, refrain from adopting such a price policy because the losses in the future may far exceed the present gains. Thus, the monopolist may lower the price at present to expand its market share in future.
Limitation # 7. The Strong Countervailing Power of the Trade Unions and of the Suppliers of Raw Materials:
ADVERTISEMENTS:
The trade unions and the suppliers of raw materials to the monopolist may resent the high price policy of the monopolist. If they are well-organised and strong, they may curb the power of a monopolist to charge any price he likes.
Conclusion:
The above description shows that a monopolist cannot charge any price he likes although in theory it is assumed that he has the power to do so.