A monopoly exists when a single firm is the sole seller in a market with no close substitutes. Unlike competitive firms, a monopolist has market power — the ability to influence the price by choosing how much to produce.
Monopoly basics start with understanding why monopolies exist. Barriers to entry — patents, control of key resources, economies of scale, or government licenses — prevent competitors from entering. The monopolist faces the entire market demand curve, which slopes downward. To sell more, it must lower the price on all units, not just the additional one. This means marginal revenue is always less than price.
Monopoly pricing follows the same profit-maximization rule as any firm: produce where marginal revenue equals marginal cost (MR = MC). But because MR is below the demand curve, the monopolist produces less and charges more than a competitive market would. The result is deadweight loss — transactions that would benefit both buyers and sellers do not happen because the monopolist restricts output to keep prices high.
Price discrimination is the monopolist's strategy to capture more surplus. First-degree price discrimination (charging each consumer their maximum willingness to pay) eliminates deadweight loss but transfers all surplus to the firm. Third-degree price discrimination (different prices for different groups, like student discounts) is far more common. Second-degree price discrimination (quantity discounts, bundling) falls in between.
Interactive monopoly graphs let you adjust output, see how MR diverges from demand, and visualize the deadweight loss that market power creates.