How companies derive monopoly profits

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Monopoly profit is a special kind of economic benefit arising under monopoly. Such profit is due
to the ability of a monopolist to restrict competition and affect the price of the product in its favor.
There is a causal relationship, and a marked contrast between uncertainty on one hand, and
monopoly, on the other, as sources of profit.

The causal relationship is manifested in the fact that the entrepreneur can reduce the
uncertainty, or at least mitigate its impact by achieving monopoly power. Monopoly profit is
called the profit above the average, usually under conditions of perfect monopoly, profit of a
single firm surpasses the average on the market, as a result of their special position in the

The existence of a monopoly in one form or another is born out of the desire to amass obscene
levels of profit. One of the conditions of monopoly profit is the firm's ability to influence prices by
setting them to maximum advantage. Thus riding on the market power brandished through price
and other strategies.

A company which enjoys monopolistic power of setting prices, will normally be inclined to set
hefty prices which constitute the maximum profit level. This means the most profitable price they
are in a position of setting (otherwise known as the monopoly price) is bound to hover around
the optimum output level, in which case marginal cost touches marginal revenue.

Under ordinary market conditions, such a price will still be greater than the marginal cost
involved in production, showing that the consumer price is higher than the company's marginal
cost. Ordinarily, a company that introduces a new product would obtain a monopoly for some

In the event that consumers are amply aware of full information on market prices in relation to
particular products offered by different companies, there cannot be a persistent monopolistic
state of affairs. Although, barriers to entry effected by one or more of the market players can still
be created in many ways.

For instance, patent rights can induce legal monopoly for the patent holder, and similarly when a
particular raw material or natural resource under the full control by a single entity, this can
simply translates to a natural monopoly.

The government for its part is able to control some of the monopolistic tendencies by companies
by regulating issues around incremental cost. Essentially, it can curtail the activities by ensuring
that prices charged do not exceed the incremental cost, to thwart profiteering.

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