Perfect competition is one end of the spectrum of market structures. At
the other end is monopoly. When the output of an entire industry
is produced by a single firm, we call that firm a monopolist or a
monopoly firm. A perfectly competitive firm has no market power, which
means it has no ability to influence the market-determined price. A
monopolist, on the other hand, has the maximum possible market power
because it is the only firm in its industry. These two extremes of
behaviour are useful for economists in their study of market structures.
Examples of monopoly are relatively rare, partly because when they do
exist their high profits attract entry by rival firms, at which point they
cease to be monopolists. When a monopoly is able to persist, it is often
because it has been granted some special protection by government, as in
the case of electric utilities (often owned by provincial governments) or
prescription drugs (which are often protected by patents). Even though
monopolies are rare, some monopoly behaviour extends to other market
structures that we will study in later chapters.
In this chapter we examine how a profit-maximizing monopolist
determines its price and quantity. We begin by considering a monopolist
that sells all its output at a single price. We then consider cartels that are
formed when several firms band together in order to behave more like a
monopolist. We end the chapter by examining situations in which
monopolists and other firms with market power are able to charge
different prices to different customers—something you have probably
observed with airline tickets, subway and bus passes, movie tickets, and
even some products at your local grocery store.