Is the following statement accurate: "A monopolist always charges the highest possible price"?

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While monopolies can often charge more than a non-monopolistic firm could, they do not necessarily charge the highest price possible. This is for a number of reasons. First of all, charging a price that is too high for consumers will possibly backfire. Consumers will likely choose not to buy the product or service at all. Overcharging can lead to a reduction in market demand. It is true that a monopoly has a lot of leeway in how much it can charge for its product. However, consumer demand for that product will put limitations on how much it can charge. Consumers are never compelled to purchase a product.

Second of all, overcharging could result in the introduction of a new competitive firm that will try to undercut the monopoly's prices. The last thing that a monopoly wants is to create competition and lose their monopolistic position.

There can also be pressure and regulations from the government to not overcharge. In several instances, the government has the authority to place limitations on price increases in the name of consumer protection. This is particularly the case when it comes to private utility companies. If it is determined that a monopoly has become too powerful and exploitive of consumers, a government may be able to break it up. While this rarely occurs, fear of this can also keep a monopoly from charging too high a price.

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The key issue here is the meaning of "possible." Obviously, a monopolist will be able to charge more than a seller in a more competitive economic environment, but that does not mean that a monopolist will be able to raise prices indefinitely, as there are several factors that put downwards pressure on prices.

First, there is a certain price buyers are willing to pay for a given good. For example, if a monopolist cornered the entire market for avocados and started raising prices, many people might choose not to buy avocados. Therefore the monopolist has to set a price that maximizes profit by balancing price per avocado against number of avocados sold. Obviously, a monopolist has a greater advantage in selling necessities such as medical care, electricity, or clean water than selling luxury goods, but still, price per item must always be balanced against total sales.

Next, if a monopolist prices certain goods or services too high, that gives competitors incentives to enter the market and disrupt the monopoly. Where a monopoly is run by the state, that might not be possible, but still people might be incentivized to steal or find alternatives. For example, if a power company has a monopoly on electricity and charges exorbitant prices, people might invest in rooftop solar or illegally tap into the power grid.

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A monopolist cannot always charge the highest prices without potentially hurting business. Consumers have choices as to how to spend their money. If a monopolist charges too high of a price, the consumer may choose to do without a certain good or service. The consumer may also look for acceptable substitutes.

For example, pretend as though there is one company that dominates the soft drink industry. If that company makes the price of a soft drink too expensive, people may choose to do without soft drinks and look for viable alternatives, such as water.

Monopolists must be aware of the demand for their products. Demand can fluctuate based on the nature of the product and the demographic intended to purchase the product. A company that has a monopoly in video games cannot charge too much for a game as people will choose to do without the game, or they may choose other leisure activities.

The monopolist must balance the cost of making the product against what people are willing to pay. In a market economy, this means finding the point at which people are most likely to purchase the product. High prices will scare away the consumer even if a monopoly exists. Even if there is a monopoly at the current time, high prices charged by the monopoly for a good may push other people into starting competing businesses.

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No, this statement is not accurate.  Monopolists cannot simply raise prices as high as they like.  The demand for their goods or services may be less elastic than the demand for most other products, but the demand curve is still downward sloping.  Monopolists cannot raise their prices indiscriminately if they wish to maximize their profits.

It is true that consumers cannot buy a competitor’s products if a monopolist raises its prices.  However, this does not mean that they have no option but to buy.  For example, let us think about a small town whose airport is only served by one airline.  People from that town cannot choose a competing airline.  However, if the airline that serves the town raises its prices too high, some people will likely choose not to fly at all.  This means that the airline cannot just raise its prices as high as it wishes.

In all market structures, firms maximize their profits by producing the quantity of goods where their marginal costs are equal to their marginal revenue.  A monopolist is no different.  It finds this point and charges the price at which people demand that quantity of the goods. 

Monopolists, then, can raise their prices more than most firms, but they cannot raise them as high as they wish. 

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