Study notes

Monopoly - Price and Output for a Monopolist

A pure monopolist in an industry is a single seller. It is rare for a firm to have a pure monopoly – except when the industry is state-owned and has a legally protected monopoly

  • The Royal Mail used to have a statutory monopoly on delivering household mail. This is changing fast as the industry seen fresh competition. The Royal Mail was part-privatised in 2013.
  • A working monopoly: A working monopoly is any firm with greater than 25% of the industries' total sales. In practice, there are many markets where businesses enjoy a degree of monopoly power even if they do not have a 25% market share.
  • A dominant firm is a firm that has at least forty per cent of their given market

Price and output under a pure monopoly

  • A monopolist can take market demand as its own demand curve
  • The firm is a price maker but it cannot charge a price that the consumers will not bear
  • A monopolist has market power which is the power to raise price above marginal cost without fear of losing supernormal profits to new entrants to a market
  • In this sense, price elasticity of demand acts as a constraint on the pricing-power of the monopolist
  • Assuming that the monopolist aims to maximise profits (where MR=MC), we establish a short run price and output equilibrium as shown in the diagram below
Profit maximising price and output
Maximizing Profit under Monopoly
Maximizing Profit under Monopoly

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