Buy a Monopolist Firm

We are specifically buying a franchise. If a monopolist's goal is to maximize profits, it follows directly that we will never produce an output level on the inelastic portion of her demand curve. If we were to increase our price at such an output level, the effect would be to increase total revenue. The price increase would also reduce the quantity demanded, which, in turn, would reduce the monopolist's total cost. Since economic profit is the difference between total revenue and total cost, profit would necessarily increase in response to a price increase from an initial position on the inelastic portion of the demand curve. The profit-maximizing level of output must therefore lie on the elastic portion of the demand curve, where further price increases would cause both revenue and costs to go down.

References

The Open University of Hong Kong (1998) 'Imperfect competition' in EC301 Economic Analysis of Business and Public Policies, Hong Kong: OUHK.

Pashigian, P B (1998) Price theory and application, New York: Worth.

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