Story
Some products are made by only one firm. That's the case of Zoe's lemonade stand, the only one in her neighborhood. She has a monopoly. In this chapter, we follow Zoe in her decision making process. We will analyze how she chooses the quantity of lemonade to produce to maximize her profit.
Objectives
The main goal is to maximize Zoe's profit. To that aim, there are a couple of notions to understand
- Marginal Revenue — What Zoe gains if she produces a tiny bit more lemonade
- Marginal Costs — How Zoe measures the additional production costs if she produces a tiny bit more lemonade
- Profit Maximization — Zoe maximizes her profit when her marginal revenue is equal to her marginal cost
What does that tell about you?
In a monopolistic market, the quantity is lower, and the price is higher compared to a perfectly competitive market. A typical example is Telecom companies because networks can hardly coexist. On most islands in the Pacific Ocean for example, there is only one telecom provider, meaning there is only one company that grants internet access. Their service is expensive due to their power on the market. In addition, the bandwidth is limited (low quantity), offering their customers a poor experience.
Where you live, it is likely that one company owns the infrastructure and sells bandwidth to smaller companies. These small companies then sell some bandwidth to you. The company on top has little incentive to improve your browsing experience. But at least the intermediaries compete, which caps the price you pay. Next time you complain that your connection is too slow or too expensive, look up the telecom market structure in your country.