Econ Lab · Markets
Monopoly and market power
Imagine one cafe is the only place in town to buy coffee. No rival can undercut it, so it does not have to take the market price. It sets the price. The question is how high it climbs, and how many cups go unbrewed because of it.
Drag the marginal cost slider and watch the cafe's choice move.
A monopolist sees the whole demand curve, so selling one more cup means cutting the price on every cup. That is why marginal revenue drops faster than demand. The cafe brews up to where MR meets MC, then reads the price up to the demand curve.
At a middling cost the markup is still real but tamer. The cafe pays a cup and charges , marking up as it holds output down to cups against a competitive . The MR equals MC rule has not changed, the higher cost just pushes that meeting point right, so the gap to the competitive quantity shrinks and the deadweight loss triangle is smaller.
Move the slider to change what a cup costs to make. The shaded triangle is the deadweight loss.
Why marginal revenue falls faster
A small cafe in a busy market sells one more cup at the going price and pockets that price. A monopolist cannot. To sell one more cup it has to drop the price a little, and that lower price applies to every cup it was already selling.
So the extra money from one more cup is the new price minus the discount on all the rest. With this demand curve that works out to a line with twice the slope.
Where it stops
The cafe keeps brewing as long as one more cup brings in more than it costs. It stops the moment marginal revenue falls to marginal cost. Set the two equal and solve for the quantity.
Then it reads straight up to the demand curve to find the highest price buyers will pay for that many cups, which lands at , a clean markup halfway between cost and the choke price.
What the triangle costs
A competitive market would push the price down to cost and brew cups, twice as many. The monopolist holds back. Every cup between its quantity and the competitive one is worth more to a buyer than it costs to make, yet it never gets brewed.
That lost trade is the shaded triangle. It is not money moving from buyers to the cafe, it is value that simply vanishes because the market is held shut.
What you just did
You watched market power play out in one picture. The cafe brews less, charges a markup, and leaves good trades on the table. The gap between the monopoly point and the competitive one is the whole case for caring about competition.