On Monopoly Price

Abstract

SUMMARYA fundamental proposition from elementary price theory is that monopoly profits are maximized at the price that equates the marginal revenue derived from the long‐run demand curve to the marginal cost of production. An equally well known proposition is that demand elasticities are greater in the long‐run than the short‐run. It is shown in the present paper that the former proposition is qualified in important ways when the latter proposition is incorporated into the analysis of the monopoly problem. In general, the monopoly profit maximizing price will be higher than the one derived from the conventional analysis. This will not be true in the special case of linear short and long‐run demand curves with an initial price that chokes off all demand. In this case the profit maximizing monopoly price will be identical to that obtained from the standard approach. As this suggests, and as we show, price history is an important consideration when choosing the profit maximizing price. The lower the price in the past the higher, in general, will be the price that maximizes the present value of future profits, and the greater this present value will be.