Welfare Loss from Monopoly Pricing

This revision video looks at the welfare loss associated with firms using their market power to price above marginal and average cost.

Firms with monopoly power can setprice well above marginal and average cost and achieve high supernormal profits. Higher prices can lead to a deadweight loss of economic welfare because it restricts output and can also lead to an increase in inequality. This is a cause of market failure.

The analysis here assumes that themonopoly is unregulated and is also aprofit maximiser. Both of these assumptions can be challenged in real world markets and industries.

There are also welfare effects to consider if the monopoly engages in price discrimination – charging different prices to different groups of consumers.