Pricing under monopoly refers to the price of a good or service which is set at a higher level than that of competitive price. The monopoly keeps costs and prices under control. It has monopoly power to decide the level of prices. If a business is starting up then it may become a potential competitor of the monopolist. When a business becomes a potential competitor, it tends to lower its prices in order to lure customers to it.
Pricing under monopoly is determined by the equilibrium point of the monopolist firm. When a firm establishes its own equilibrium level of output, the firm will tend to attend its own equilibrium point. To determine optimum pricing and the optimal level of production, there are usually two methods. These methods are known as the process of first-past-the-pole and first-past-the-century. The process of first-past-the-pole involves pricing at the most profitable point for the monopolist firm; while the process of first-past-the-century involves ignoring all previous prices. In the monopoly condition, the monopoly firm can adjust the production of a good or service below the cost or profit of production at its own equilibrium point.
The price determination method of first-past-the-pole involves a problem concerning the definition of value. Value is a calculable object but its determination is a value, not a calculable relation. Thus, even the concept of value is open to grave confusion in the analysis of monopoly problems. As a result of this problem, the method of first-past-the-century is used instead of determining the value of a good or service on the basis of its cost and dividing the cost of production by the value of production to arrive at a determination of optimal price.
In the analysis of pricing under monopoly, it is sometimes necessary to draw a line through the value of the production curve so that a downward sloping curve can be determined. The downward-sloping curve is used to indicate the point on the curve at which the concentration of production is above the level that would be justified as the point of equilibrium. (A downward sloping curve can also be used to show the location of optimum production, called the concentration point, where a business is centrally located.) The horizontal distance between the centres of concentration at the pointe may be plotted as a negative slope on a log-log plot. This indicates the tendency of the price of a good or service to decrease as the concentration of production increases.
If we assume that the equilibrium level of pricing under monopoly of maximum monopoly profits, then the prices at which a business could acquire the services from its competitors are also assumed to be the equilibrium level. The location of the equilibrium level is called the target price. It is equal to the lowest price that would be charged by a business if it were to start selling its products in the target market. Accordingly, the set of theoretical prices referred to in the analysis of monopoly failure is called the marginal cost function. A model monopoly is said to be a problem when the value of the marginal revenue of the competitors is lower than the value of the monopoly profits.
To determine output determination, a firm may use either the technical or economic theories. In the analysis of a monopoly, the general-prices concept is used. The output price is set equal to the greatest value of all inputs necessary to obtain the firm's total income. The assumption of imperfect information leads to a value of price equal to the theoretical price minus the difference in the firms' technical and organizational structures. Analysis of monopoly failure requires knowledge of the location of the optimal value of production along with the assumption of imperfect information, a downward sloping demand curve, and the existence of a monopoly.
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