Question

At a business conference in New York, you met a manger of a company who mentioned to you that his company enjoys a monopoly power in his area and hence worries not about his profits. What would be your advice to this manager as an economist?

Answer 1

The monopoly price is assumed to be higher than both marginal and average costs leading to a loss of allocative efficiency and a failure of the market. The monopolist is extracting a price from consumers that is above the cost of resources used in making the product and, consumers' needs and wants are not being satisfied, as the product is being under-consumed.

The higher average cost, if there are inefficiencies in production, means that the firm is not making optimum use of scarce resources. Under these conditions, there may be a case for government intervention for example through competition policy or market deregulation.