How does the existence of monopoly power affect the level of prices?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The existence of monopoly power makes the level of prices rise.  This is one reason why monopolies are considered to be bad.

Monopolies face no competition.  It is impossible for firms to enter the market and compete with the monopoly.  Therefore, they are able to make economic profit.  Unlike in perfect competition, there are no other firms to force the monopolist to lower its prices.

Monopolies will choose (in order to maximize their profit) to produce a quantity of output that is lower than what the customers would prefer.  It will choose to produce that at a higher price than customers would prefer.  Therefore, a monopoly produces fewer goods at higher prices than would be the case in a perfectly competitive market.

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