Four Market Model Summary: Monopoly: Videos & Practice Problems

A monopoly market structure is defined by a single supplier or firm that dominates the entire market. Key characteristics include high barriers to entry, which prevent other firms from entering the market. These barriers can be due to natural monopolies, government patents, or control over essential resources. The firm maximizes profit where marginal revenue (MR) equals marginal cost (MC), but unlike perfect competition, the price (P) is greater than both MR and MC. This allows the monopoly to sustain long-run profits. Examples include utility companies like electricity providers and pharmaceutical companies with patented drugs. The monopoly’s market power enables it to influence prices and output levels, leading to less competition and potential inefficiencies compared to competitive markets.

A monopoly maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC), expressed as $\mathrm{MR}=\mathrm{MC}$. However, because the monopoly faces a downward-sloping demand curve, the price (P) it charges is higher than the marginal revenue. The firm sets the price based on the demand curve at the profit-maximizing quantity, so $P>\mathrm{MR}=\mathrm{MC}$. This pricing strategy allows the monopoly to earn economic profits in the long run, unlike firms in perfect competition where price equals marginal cost. The monopoly restricts output below the socially optimal level to maintain higher prices and profits.

Monopolies have high barriers to entry that prevent other firms from entering the market and competing. These barriers can arise from natural monopolies, where economies of scale make a single producer more efficient (e.g., electricity companies), government regulations or patents that legally protect the firm’s exclusive right to produce (e.g., prescription drugs), or control over key resources. For example, a pharmaceutical company with a patent on a new drug has exclusive production rights for 20 years, incentivizing research and development. These barriers ensure the monopoly maintains market power and can sustain long-run profits without competition.

In perfect competition, price (P), marginal revenue (MR), and marginal cost (MC) are equal, so $P=\mathrm{MR}=\mathrm{MC}$. This means firms are price takers and produce where price equals marginal cost. In contrast, a monopoly faces a downward-sloping demand curve, so marginal revenue is less than price, . The monopoly maximizes profit where $\mathrm{MR}=\mathrm{MC}$, but since $P>\mathrm{MR}$, the price charged is above marginal cost. This difference allows the monopoly to restrict output and charge higher prices, leading to higher profits but also potential inefficiencies and deadweight loss in the market.

Yes, monopolies can earn long-run economic profits because of the high barriers to entry that prevent other firms from entering the market and competing away those profits. Since the monopoly is the sole supplier, it can restrict output and set prices above marginal cost, sustaining profits over time. Unlike in perfect competition, where free entry drives profits to zero in the long run, monopolies maintain market power through natural monopolies, patents, or government protection, allowing them to earn positive economic profits indefinitely.