Monopoly

In this section, we describe the monopolist’s output decisions. This discussion allows us to develop a measure of the degree of market power and to discuss alternative conception of the welfare loss imposed on society by monopoly. Finally, we discuss economist’ attempts to measure the economic effects of market power.

Monopoly Defined

Two things distinguish a monopoly from a competitive market: there is only one supplier, and entry is blockaded. The first condition ensures that the monopolist faces no actual competition. Life should always be so simple.

Marginal Revenue

The competitive firm is a price taker. The monopolist is a price maker. The competitive firm takes the market price as a given and adjusts its output until its marginal cost equals price, because the competitive firm is so small in the market that it can sell all it wants at the market price. When the monopolist produces and sells an extra unit of output, it must move down the market demand curve. In so moving, it suffers a price reduction on output it previously sold at a higher price. This price reduction as output increases leads us to the concept of marginal revenue.

Marginal revenue is the change in total revenue per unit change in the quantity demanded. Where the Greek letter denotes a change in the corresponding variable Marginal revenue is less then price because the sale of an additional unit of output requires a move down the demand curve, and hence a reduction in price and loss in revenue on units that might have been sold at a higher price.