Monopoly Can a Monopolist Set

Monopoly

Can a monopolist set ANY price? Is there a limit?

Monopolies are defined by having extremely limited or no competition, high barriers to entry, and significant control over the market. One example of a company that can be viewed as monopolistic is Microsoft. Microsoft is the provider of the most popular operating system on the planet. Although there are a few sources of competition, Microsoft virtually dominates the market. However, since there are some competitors that consumers could turn to it is not a perfect monopoly. If Microsoft raised its prices too dramatically or if its quality significantly deteriorated then consumers could quickly switch to product's running Apple's OS, Linux, or a handful of other options.

Because of the situation that Microsoft is currently in regards to market structure, it has a significant amount of control over its pricing. Microsoft can charge a premium price for their goods and services and consumers cannot negotiate or easily switch to another platform. Generally in regards to operating systems there is a learning curve that dictates the time it would take to switch to a different platform. Furthermore, if customers wished to switch to an Apple OS then there might be an additional hardware investment required as well. Thus the switching costs give Apple a substantial amount of control over price setting.

Even though Microsoft can charge a premium for its goods and services, it is not at liberty to go beyond a certain point in regard to price. If Microsoft's prices became too exorbitant then there are several things that could happen. One immediate ramification could be that the government intervenes in the market to limit Microsoft's monopolistic power. This has occurred frequently and Microsoft is constantly engaged in court proceedings to verify that it is not abusing its market position.

Another limiting factor would be that if Microsoft charged too much for its products then this would open the door for another company to enter the market or gain market share. For example, if Microsoft's OS's became too expensive then this would open a greater door for smaller competitors such as Linux. For most consumers, Microsoft's price does not exceed their switching costs for moving to a different platform. However, if Microsoft increases its prices substantially then this situation could be different.