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Monopoly
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== Inverse elasticity rule == A monopoly chooses that price that maximizes the difference between total revenue and total cost. The basic markup rule (as measured by the [[Lerner index]]) can be expressed as <math>\frac{P - MC}{P} = \frac{-1}{E_d}</math>, where <math>E_d</math> is the price elasticity of demand the firm faces.<ref name="Tirole">Tirole, p. 66.</ref> The markup rules indicate that the ratio between profit margin and the price is inversely proportional to the price elasticity of demand.<ref name="Tirole" /> The implication of the rule is that the more elastic the demand for the product the less [[pricing power]] the monopoly has. === Market power === Market power is the ability to increase the product's price above marginal cost without losing all customers.<ref>Tirole, p. 65.</ref> Perfectly competitive (PC) companies have zero market power when it comes to setting prices. All companies of a PC market are price takers. The price is set by the interaction of demand and supply at the market or aggregate level. Individual companies simply take the price determined by the market and produce that quantity of output that maximizes the company's profits. If a PC company attempted to increase prices above the market level all its customers would abandon the company and purchase at the market price from other companies. A monopoly has considerable although not unlimited market power. A monopoly has the power to set prices or quantities although not both.<ref>Hirschey (2000), p. 412.</ref> A monopoly is a price maker.<ref>{{cite book | last1 = Melvin | first1 = Michael | last2 = Boyes | first2 = William | title = Microeconomics | edition = 5th | publisher = Houghton Mifflin | year = 2002 | page = 239}}</ref> The monopoly is the market<ref>Pindyck and Rubinfeld (2001), p. 328.</ref> and prices are set by the monopolist based on their circumstances and not the interaction of demand and supply. The two primary factors determining monopoly market power are the company's demand curve and its cost structure.<ref>Varian (1992), p. 233.</ref> Market power is the ability to affect the terms and conditions of exchange so that the price of a product is set by a single company (price is not imposed by the market as in perfect competition).<ref>Png (1999).</ref><ref>{{cite book | last1 = Krugman | first1 = Paul | last2 = Wells | first2 = Robin | title = Microeconomics | edition = 2nd | publisher = Worth | year = 2009}}</ref> Although a monopoly's market power is great it is still limited by the demand side of the market. A monopoly has a negatively sloped demand curve, not a perfectly inelastic curve. Consequently, any price increase will result in the loss of some customers.
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