In order to assess the situation, we have to look at how companies that act as a monopoly operate ordinarily – then we come to the monopolist strategy. In conditions of monopoly, customers are price takers and the company is free to raise the prices at will. However, a new competitor is due to arrive in the marketplace. Accordingly, the supply is going to increase about which the monopolizing company cannot do anything.
Monopolist strategy: Shift in Pricing Strategy
On the other hand, the pricing strategy would be changed to compensate for the new competition. That is, prices are likely to be reduced by the monopolizing company in order to compete better and retain a larger proportion of market share. Even if the products being distributed by the monopolizing company are far superior, it can barely afford to adopt market skimming. Prices are, in this case, likely to either remain steady or also decrease; price increases are out of the question. Even if the iPhone was beyond the reach of many people in 2007, a number of replica phones from China flooded the market at around the same time – the quality was highly inferior but the prices were low and these were picked up.
Monopolist strategy: Monopolist & Efficiency
The monopolist would be more efficient in the long run considering new competition has entered the marketplace because of the economics of scale that will work in its favor in the long run, reducing the production costs. At the same time, technical innovation and improvement in methods in the long run will also work in its favor. When competition stands to challenge, the monopoly can easily lease into an equilibrium where higher outputs end up balancing a lower cost. As long as the prices are under the competitive price, they will continue to sell (Etro, 2009).
Etro, F. (2009). Endogenous Market Structures and the Macroeconomy. New York, NY: Springer.
"Monopolies" Please respond to the following:
From the first e-Activity, imagine this company acting as a monopoly was to have a new competitor arrive in the marketplace. Assess how the monopoly would likely change its pricing strategy to compensate for the new competition.
From the first e-Activity, speculate how the monopolist could be more efficient in the long-run considering new competition has entered the marketplace.