What is wrong with this rationale?
A mutual fund manager buys stocks in companies whose stock price will rise. The only stocks bought are monopoly companies rather than perfectly competitive companies. The manager's rationale is the monopoly company stocks are a "sure thing" since customers have no alternative suppliers, which means monopolies earn so much more profit than perfectly competitive firms (it is expected to result in higher stock prices for the monopoly companies).
1 Answer | Add Yours
There are at least two important problems with this rationale.
First, even if monopolies are "sure things," this fact will already be taken into account in the price of their stock. Everyone would know that they were "sure things" and their stock price would be high. This means that the price of the monopolies' stock would not be so likely to rise, which is what an investor would want.
Second, monopolies are not really "sure things." It is true that customers have no alternative suppliers. But they do have the alternative of simply not buying the good or service. A monopoly's demand curve is downward sloping. Therefore, it is possible for a monopoly to make little profit or even no profit depending on the prices it sets for its product and the demand for them.
We’ve answered 318,955 questions. We can answer yours, too.Ask a question