11.2 Market Power and Welfare
What determines how high a price a monopoly can charge? A monopoly has market power: the ability of a firm to charge a price above marginal cost and earn a positive profit. In this section, we examine the factors that determine how much above its marginal cost a monopoly sets its price and its effect on welfare.
Market Power and the Shape of the Demand Curve
The degree to which the monopoly raises its price above its marginal cost depends on the shape of the demand curve at the profit-maximizing quantity. If the monopoly faces a highly elastic—nearly flat—demand curve at the profit-maximizing quantity, it would lose substantial sales if it raised its price by even a small amount. Conversely, if the demand curve ...
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