Final answer:
Monopolists charge a higher markup when customers have few good substitutes because the demand curve is less elastic, giving them the power to raise prices without significant loss of customers. Conversely, they charge lower markups when many good substitutes exist, due to a more elastic demand curve risking the loss of customers to competitors.
Step-by-step explanation:
The rule regarding pricing for monopolists relates to the elasticity of the demand curve they face and the availability of substitutes for consumers. When customers have many good substitutes, the firm is not a pure monopoly but rather a monopolistic competitor. The demand curve for a product with many substitutes is more elastic, implying that if the monopolistic competitor raises its price, it is likely to lose more customers who can switch to the substitutes available. Therefore, monopolists tend to charge a lower markup when customers have many good substitutes because raising prices significantly could drive customers to competitors' products.
Conversely, when customers have few good substitutes, the firm faces a less elastic demand curve, allowing it to be a monopoly producer. In this case, if the monopolist raises its price, consumers have fewer alternatives and are more likely to continue purchasing the monopolist's product despite the price increase. This means monopolists can charge a higher markup when customers have few good substitutes because the lack of competition provides them with the market power to do so without losing many customers.