A monopoly may find it easier to retain customer goodwill by pricing its goods below the profit-maximizing price.
A monopolist is a firm that produces goods and services that have no close substitutes and faces no competition. Most goods or services produced by a monopolist are essential to the consumer, such as electricity and water supply. They are price makers in the industry, which means that prices they set on their products are not influenced by market demand. In a monopoly, the profit-maximizing price is the point at which the marginal cost equals marginal revenue. At this point, the prices are not favorable to the consumer.
Fear of Competition
A monopolist charges high prices because there are few or no similar firms in the industry. As a result, they tend to make huge profits that serve as an incentive to investors who want to join the market. When new firms enter the market, the monopolist faces increased competition. To minimize the chances of losing customers to newer entrants, the monopolist may ensure that it sets its prices below the profit-maximizing level.
Emergence of Substitutes
When a monopolist charges high prices for a good or service, consumers opt for a cheaper substitute even though it may offer lesser satisfaction. A monopolist has a downward sloping demand curve, which indicates that if its products become costly, they can be substituted.
Government Regulation
Some essential goods and services consumed by the public are produced by monopolists, such as water and gas. Governments set a price ceiling for these essential goods and services. This price ceiling is sometimes pegged below the profit maximization price. The government sets these laws to restrict monopolists from exploiting citizens through overpricing essential commodities that are unaffordable to the average consumers.
Import Bans
In international trade market, monopolists who control the production of specific goods or services can maximize their profits by overpricing their commodities. Governments may impose a ban on imports that they consider overpriced. The monopolists may thus lower prices in a bid to regain key export markets that consume their goods in larger quantities.
Target Profit Achievement
After achieving the target profits, a firm prices its commodities at a lower figure than the profit-maximizing price. This applies to public corporations whose main goal is not to earn profits, but to provide essential goods and services. For example, public corporations handle sensitive goods such as nuclear substances that should not be left in the hands of the private sector.
Tags: goods services, essential goods, essential goods services, profit-maximizing price, below profit-maximizing