1. Monopoly
Chapter 10

2. 10. Monopoly 10.1 Uniform Pricing 10.2 Differential Pricing
10.3 Personalized Pricing
10.4 Group Pricing
10.5 Menu Pricing: Unit-demand Bundling

3. Chapter 10: Monopoly
A monopoly is a market structure with a single producer, so effectively the firm is the industry.
A monopoly can engage in
uniform pricing, or
differential pricing
A monopoly IS NOT a price-taker and can set both
the price, and
the quantity

4. 10.1 Uniform Pricing 10.1.1 Profit Maximization
A monopoly’s problem is
to find a quantity-price combination (Q∗, p∗) that lies on the market demand curve so as to maximize its profits.
Profit Maximization
Inverse market demand curve: p = D(Q)
π(Q) = D(Q)Q − c(Q),
total revenue
cost fuction

5. ...10.1.1 Profit Maximization ⇒ Maximization Condition:
π′(Q∗) = [D(Q∗) + D′(Q∗)Q∗] − c′(Q∗) = 0
⇒ D(Q∗) + D′(Q∗)Q∗ = c′(Q∗).
Factoring out p∗, we get
marginal revenue
marginal cost
p∗ = D(Q∗) ⇒

6. Profit Maximization
The monopolist charges a price that is greater than the cost of producing the last unit (marginal cost)
absolute mark-up
relative mark-up
≥ 0
Relative mark-up is a unit-free measure of market power known as the Lerner Index
The more price-elastic the demand the lower the relative mark-up.

7. 10.1.2 Calculating Monopoly Output and Price
From the inverse demand, find the MR.
Set the MR from step 1 equal to the MC and solve for the profit-maximizing output level, Q∗.
Substitute Q∗ into the inverse demand to find the price, p∗

8. ...10.1.2 Calculating Monopoly Output and Price
Linear demand
p = 120 − Q
c(Q) = Q2
MR = 120 − 2Q
MC = c′(Q) = 2Q
Q∗ = 30
MR = MC ⇒
p∗ = $90
Figure 10.1 Monopoly output and price

9. ...10.1.2 Calculating Monopoly Output and Price
Constant-elasticity demand
Q = Apε ⇒ p = (Q/A)1/ε
TR = pQ = A−1/εQ(1+ε)/ε
In order for a monopoly to produce, the demand must be elastic
(i.e., |ε| > 1)

10. 10.1.3 Inefficiency of uniform-pricing monopoly
The blue shaded triangle represents foregone gains from trade and is the deadweight loss of a monopoly
Figure 10.1 Monopoly output and price