Competition vs Monopoly

Put the same market side by side: competition on the left, monopoly on the right.

With competition, many 🏪 shops pull the price down toward cost. A monopolist stops where marginal revenue meets marginal cost. Fewer trades happen, and the lost gains stay as a red triangle. The less price-sensitive customers are, the bigger that triangle grows.

For example, if one video app is the only one your 🧑 classmates watch, a fee hike leaves them nowhere to go. With three similar apps, one hike sends everyone elsewhere. The more trapped the customers, the bigger the monopolist's triangle.

MR=MCMR = MC
ϵ=%ΔQ%ΔP\epsilon = \frac{\%\Delta Q}{\%\Delta P}

Part of these learning paths

Examples & Exercises

Streaming demand is Q=24−1.5PQ = 24 - 1.5P with marginal cost MC=4MC = 4.

Compare price and quantity under competition and monopoly.

Demand responsiveness 1.51.5, marginal cost 44 — the default setup.
Show proof

  1. Under competition the price is pushed down to cost: P=MC=4P = MC = 4, Q=24−1.5⋅4=18Q = 24 - 1.5 \cdot 4 = 18. Consumer surplus is the triangle (16−4)⋅182=108\frac{(16-4) \cdot 18}{2} = 108.

  2. The monopolist stops at MR=MCMR = MC — exactly half the competitive quantity, Q=9Q = 9.

    Price jumps to P=10P = 10 and consumer surplus shrinks to 2727.

    The missing 2727 is the red triangle (deadweight loss).

If customers become less price-sensitive (responsiveness 1.5→0.751.5 \to 0.75), does monopoly hurt more or less?

Responsiveness 0.750.75 — customers who do not walk away.
Show proof

  1. Competitive quantity is Q=24−0.75⋅4=21Q = 24 - 0.75 \cdot 4 = 21, monopoly quantity is half of it, 10.510.5, and the monopoly price soars to P=18P = 18.

  2. Deadweight loss is (18−4)⋅(21−10.5)2=73.5\frac{(18-4) \cdot (21-10.5)}{2} = 73.5 — far bigger than the 2727 at responsiveness 1.51.5. Customers who never leave are the monopolist's favorite gift.

1. Intro to Microeconomics