Introduction to Pricing Under Monopoly
Pricing under monopoly is a dilemma faced by many companies when deciding which properties to invest in at the earliest. The most commonly applied economic principle is that the cost of production is equal to the value of production multiplied by the quantity of investment. This means that if the price of good doubles, the company has to invest double the amount of money. The principle is very useful in determining what strategies should be adopted during a period of market domination by a firm.
Pricing under monopoly of a firm is determined by the firm’s balance sheet. When a firm establishes a monopoly, it commands a valued quantity of the product/goods on the market. When it produces an above-average volume or maximizes profit, then the firm is maximizing its value. To determine the value and Pricing under monopoly, there are two methods.
The first method of Price determination is to value based on the production costs and sale prices of the product. In this case, if there is a competitive price then the monopoly produces below-average quality products. On the other hand, if there is a competitive price then the firm should be able to increase production levels above average quality. Thus, the profits n this case can be considered as an added bonus.
The second method of determining pricing is to use value-based pricing under monopoly condition. The firm is allowed to set its own prices dependent on market conditions. It is not required to value based on production costs, since these conditions are irrelevant under this condition. Rather, firms are free to choose their prices in accordance with demand. Thus, even though there is no requirement for firms to establish or maintain a balance sheet, they can still set their own prices.
Although the principle of Price determination is important in all economic situations, it is particularly relevant in a monopoly environment. Prices can never be controlled by any firm within the monopoly. Since firms in a monopoly do not compete, they have no need to determine prices using a principle of demand-based pricing. If, however, one firm develops a product that competes with those of its competitors, it is possible for it to use the principle of competition to force its competitors to lower their prices, provided that it can effectively induce them to do so.
This principle of the competition will not, however, prevent firms from developing more efficient and competitive products. For example, it is perfectly acceptable for a manufacturer to develop a product that competes with those of its competitors, provided that it is effective in competing with them. By making its products more competitive, it forces its competitors to lower their prices. Since the manufacturer has effectively forced its competitors to sell at its prices, under a Monopoly, the under monopoly can be eliminated through superior marketing.
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