Monopoly profit

Monopoly profit is an inflated level of profit due to the monopolistic practices of an enterprise. Traditional economics state that in a competitive market, no firm can command elevated premiums for the price of goods and services as a result of sufficient competition. In contrast, insufficient competition can provide a producer with disproportionate pricing power. Withholding production to drive prices higher produces additional profit, which is called monopoly profits. According to classical and neoclassical economic thought, firms in a perfectly competitive market are price takers because no firm can charge a price that is different from the equilibrium price set within the entire industry's perfectly competitive market. Since a competitive market has many competing firms, a customer can buy widgets from any of the competing firms. Because of this tight competition, competing firms in a market each have their own horizontal demand curve that is fixed at a single price established by market equilibrium for the entire industry as a whole. Each firm in a competitive market has buyers for its product as long as the firm charges "no more than" the single price. Since firms cannot control the activities of other firms that produce the same widget sold within the market, a firm that charges a price that is higher than the industry's market equilibrium price would lose business; customers would respond by buying their widgets from other competing firms that charge the lower market equilibrium price, which makes deviation from the market equilibrium price impossible. Perfect competition is commonly characterized by an idealized situation in which all firms within the industry produce exact comparable goods that are perfect substitutes. With the exception of commodity markets, this idealized situation does not typically exist in many actual markets, but in many cases, there exist similar products that are easily interchangeable because they are close substitutes (for example, butter and margarine).