The dream of any monopoly seller is to provide a good for which there are no alternatives. Such a good, however, tends to be relatively inelastic. And consequently marginal revenue is negative, which prevents profit maximization.
Are these aspiring monopolies misguided? Should they be searching for goods with elastic demand? Are they unaware of the relation between elasticity and marginal revenue? Do they not know that they can never maximize profit if they produce a good with inelastic demand?
A Profitable Journey
The monopoly dream is not as misguided as it might first appear. The key is the phrase "profit maximization." Profit is MAXIMIZED when marginal revenue is positive and demand is elastic. In other words, when profit is maximized there is no way to INCREASE profit by doing something like increasing the price.
While profit maximization means profit can go no higher, the lack of profit maximization only means profit has NOT reached its peak. It does not mean profit is lacking. It does not mean that a monopoly firm is earning NO profit or incurring an economic loss. The lack of profit maximization ONLY means that the monopoly can take steps to increase profit. It can increase profit by doing something like increasing the price.
If a monopoly faces an inelastic demand curve, increasing the price is exactly what it can do. If the price of a good with inelastic demand is increased, then total revenue and profit also increase. Today the price is $1. Tomorrow the price is $2, and profit increases. The next day the price is $3, and profit increases again. When prices rise so too does profit. As long as demand is inelastic, then profit keeps rising. A "maximum" is not reached.
Is this is such a bad thing for the monopoly?
Not being AT THE MAXIMUM, but ONLY being able to increase profit is not really all that bad. Few firms would turn down the opportunity to be the sole provider of an inelastic product. Sure they might never MAXIMIZE their profit, that is, reach a nice stable equilibrium. But they can increase profit day after day, month after month, year after year, by raising prices. The "problem" is that profit can always go higher.
If AMD is gone the only competition in the CPU market is the Cyrix Centaur. How many companies have made pc chips for x86. They don't seem to be popping up every day.
Intel wouldn't theoretically be able to maximize profits but they would make a boatload of profit. |
