Monopoly

The Price Maker

A monopoly is a single seller facing the entire market demand curve, making it a price maker that chooses price or quantity.

Marginal revenue: MR is less than price because selling one more unit requires lowering the price on all units. For linear demand $P = a - bQ$, total revenue is $TR = aQ - bQ^2$, yielding:

$$MR = a - 2bQ$$

MR has twice the slope of demand, falling faster and hitting zero at half the intercept.

Profit maximisation: Set $MR = MC$ to find $Q^*$, then read the price directly from the demand curve above.

Common pitfall: Never read the monopoly price off the MR curve. Always climb up to the demand curve to find what customers pay.

$$\pi = (P - AC) \times Q$$

Welfare and Pricing

Deadweight loss: Monopolists restrict output ($Q_m < Q_c$) and charge higher prices ($P_m > P_c$). Unproduced units between $Q_m$ and $Q_c$ create a deadweight loss triangle.

Price discrimination types:

• First degree: Perfect, charges max willingness to pay.
• Second degree: Packages, self-selection.
• Third degree: Groups with different elasticities.

Sources of monopoly power: Patents, economies of scale, essential resources, network effects.