The monopoly model predicts that a monopolist chooses the output
qM that equates its marginal revenue and marginal cost,
and selects the price pM so that it sells quantity
qM. Figure 1 shows several important features from the
monopoly model. The seller's marginal revenue, labelled MR, lies
below the demand 'D'. The seller's marginal cost, labelled MC,
intersects MR at qM = 14, and the monopolist charges
the price pM = 32.
Figure 1: Monopoly experiment.
The area above the price and below the demand is the consumers' surplus.
In this example it is 84, which is substantially less than the
consumers' surplus that would be obtained if the price were at the
intersection of supply and demand, as is the case in the competitive
market which has consumers' surplus 220. The monopolist's profit in
this example is 308, which is much greater than the profit at the
competitive price (also 220).
One of the arguments against monopoly is that there is a surplus loss
due to the restricted output by the monopolist. The monopolist's
output only 14. At the competitive price pc = 24, there
are 20 units that trade with a surplus. The surplus on these last
six units, shown as the shaded area in the figure, is called the
monopoly deadweight loss.
One of the advantages of a monopoly experiment is that each of these
predictions can be tested. The number of trades is observed, the
average price can be computed, the surplus of the buyers can be
calculated, and so can the seller's profit. MarketLink experiments
that test the competitive equilibrium predictions have been prepared
for both the double auction and the posted offer auction.
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