Monopoly and Profits
So far we assumed that the employer is working under conditions of competition. Under perfect competition, there are no profits in the long-run. Profits must. therefore, be either temporary or monopoly profits. The monopolist is able to control output so that the price is not allowed to fall to the level of cost, as is the case under competition. By restricting entry of new firms into business by means of agreements and through the use of patent rights and similar devices, monopolists are able to reap monopoly profits. But the most common source of monopoly profits lies in monopolistic competition or product differentiation. An element of monopoly profits can also be traced in what have been called innovation profits or pioneering profits. A firm which produces a new product, or is able to discover a new material or a cheap process or a new market, will always be able to make extra gains, till its rivals make an inroad into its business. Since competition is absent, partially or totally, gains arising out of innovation or pioneering may be termed as monopoly gains. In the actual world. the typical cases are of imperfect competition, since absolute monopoly is rate. And, therefore, the element of monopoly gains is not as rare as one would think. In fact, monopoly element will be found almost in all profits. A monopolist is able to make profits both in static and dynamic conditions. He is able to so fix the price of the product that he may make substantial profits by exercising his monopoly power. In order to make prof- its he raises the price by restricting the level of his output.
Monopoly is a matter of degree only. Monopoly power is exercised by a pure monopolist who produces a product which has no close substitute. Monopoly is also exercised, though to a somewhat lesser extent, hy firms under monopolistic competition and oligopoly as mentioned above. Under various categories of imperfect competition, we know that the demand curve slopes downwards. Hence monopoly’s associated with a downward sloping demand curve. Since the demand curve under conditions of pure monopoly, monopolistic competition and oligopoly slopes downwards, firm’s equilibrium (i.e. equality between marginal revenue and marginal cost) is achieved at a price which is higher than the marginal cost of production. Also, the price so determined is often higher than the average cost of production which, therefore, yields positive profits to the firm enjoying monopoly power. Since there is strong resistance to the entry of new firms into the industry, the firms working under the monopoly or monopolistic competition continue to make super normal. profits even in the long-run. Even under monopolistic competition, owing to product differentiation, entry into the industry by new firms is not wholly free since product differentiation gives a firm a ce~n degree of monopoly power so that it can set own price. No new firm can produce exactly the same product as that of the existing firms, Since the entry of new firms is restricted, demand does not fall, even in the long run, to the tang ency position with average cost curve. The result is that entrepreneurs working under monopolistic competition continue to enjoy positive profits by virtue of their monopoly power. .
The monopolist enjoys profits owing to his monopoly power. In a previous chapter (No. 28), we have given Prof. A. P. Lerner’s quantitative measure of the degree of monopoly power. This measure of the degree of monopoly power is based on the fact that the price set by the monopolist is higher than the marginal cost due to the demand curve sloping downwards. This measure of the degree of monopoly power is based upon the ideal market, i.e., that is a market under perfect competition in which monopoly power is completely absent and. in equilibrium. price is equal to the marginal cost. Some economists, especially Prof. M. Kalccki, have asserted that the greater the degree uf monopoly. the greater the size of profits made by the firm. Kelecki thinks that tile degree of monopoly power is the most important determinant of the value of profits; in fact. he thinks that it is the only determinant of the level of profits. It may be borne in mind that the degree of monopoly power a firm (i.e., its power to set the price above the marginal cost of production) depends upon the elasticity of the demand curve facing the monopoly- ‘list. That is. smaller the elasticity of demand for the product, the greater is the power of the monopolist to set the price and hence to make profits. But elasticity of demand for a firm’s product depends upon the extent to which the product can be differentiated. The greater the product differentiation, the less elastic is the demand for the product. The degree of monopoly power also depends upon the firm’s share in the market for its product. The greater is its share, the greater is the monopoly power. Thus, a”n entrepreneur is able to set the price for its product owing to monopoly power that it has gained by the extent of distinctiveness of its product and its share in the total output or market. The entrepreneur earns profits based on its ability to set the price as high above the marginal cost as he can. But it may be noted that the enjoyment of monopoly power is no guarantee that positive profits will be made. Much depends upon the demand-cost situation. If the demand-cost situation is unfavorable, which means that costs are higher and the demand or revenue is less, even under pure monopoly, monopolistic co petition and oligopoly, under which the firms enjoy varying degrees of monopoly power, will be incurring losses. As Professor Bober observes, “He skates on thin ice who identify profits with monopoly and monopoly with profs.:
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