Price Determination in the Short Run in a Monopoly

In Defense of Monopoly: How Market Power Fosters Creative ProductionIn the short run it is assumed that entry and exit is not possible for firms. The aim of every firm is to maximize its profits.

Three conditions may be present in the short run, either the firm could earn super normal profits or incur a loss or earn a normal profit.

Strategy

In the short run, it is not necessary that all the firms would earn super normal profits. Some may incur losses or some may earn a normal profit.

Firms compete mostly on the basis of price they charge for their product. Each firm charges different price and each firm produces different quantities. In case of losses, the firm decreases its price so that it can at least cover its variable cost. It has to continue the production till it starts recovering its fixed cost.

Though the products are not perfect substitutes, they are close substitutes and hence the price changed by each firm is likely to be approximately equal to the others’ producing similar products.