Question & Answers with Chef J Stephen

 

 

Q&A

If monopolies are price makers, why don’t they charge an infinite price?

If the price (profit) of an item gets too high, a flood of (usually more innovative and fast moving) competitors will rush into the market.

The goal of a monopoly is to keep their prices just below that benchmark.

A great example of this is the current vanilla market. Controlled by a few monopolies in Madagascar, Tahiti and México, because of cyclones and terrorisim in Madagascar, prices have risen from $26 per gallon in 2015 to $426 per gallon (US) in 2017.

Because of this rapid rise in price, hundreds of more innovative companies are rushing into the market to cash in on the bonanza. This will eventually flood the market with product and bring prices back to a more normal equilibrium.

In short, unless there are extensive gateing factors preventing entry into the market (e.g. excessive capital requirements, extreme technical challenges, etc.) short term excessive profits always results in increased competition

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