Business Economics · Price Determination in Different Markets

Monopoly and Price Discrimination: CA Foundation Business Economics

Updated 1 October 2026 · Fact-checked

A monopoly is a market with a single seller of a product with no close substitutes. The monopolist maximises profit where MC = MR, with MC cutting MR from below. It then reads the price off the demand (AR) curve at that output. Price discrimination means charging different prices for the same product.

Understand Monopoly and Price Discrimination

A monopoly is a market with one seller. The product has no close substitutes, and entry by other firms is blocked. Because the firm is the only seller, it is the industry. It is a price maker, not a price taker.

Monopoly power comes from barriers to entry. Common sources are: control over a key raw material, patents and copyrights, government licences or legal rights (such as a state-run utility), large economies of scale that make one firm cheapest (a natural monopoly), and very high start-up costs.

The monopolist faces the whole market demand curve. It slopes downward. To sell more, the firm must cut the price on all units. So MR is less than AR (price) at every output after the first, and the MR curve lies below the AR curve. With a straight-line demand curve, MR falls twice as fast as AR and cuts the quantity axis at half the distance of the demand curve.

Equilibrium comes where MC = MR, with MC cutting MR from below. The firm then reads the price from the demand curve (AR) at that output. Since AR is above MR, price is above MC. Profit per unit is AR − AC. A monopolist can earn abnormal profit even in the long run because new firms cannot enter. It is not guaranteed, though. If AC is above AR at every output, the firm makes a loss.

In perfect competition, price equals MC and the firm is a price taker. In monopoly, price is above MC and output is generally lower. That is why monopoly is often seen as less efficient.

Price discrimination means selling the same product at different prices to different buyers, where the price gap is not explained by cost differences. It has three types. In first degree, the seller charges each buyer the maximum they are willing to pay. In second degree, the price depends on the quantity bought, such as bulk blocks or tariffs. In third degree, the market is split into groups, such as adults and students, or home and export markets, and each group pays a different price.

Key formulas to remember

Profit-maximising condition: MC = MR, and MC cuts MR from below; Applies to a monopolist. The second part is the second-order condition.
Price at equilibrium: Price = AR at the equilibrium output; Find Q from MC = MR, then put Q in the demand equation to get P.
Revenue relations: TR = P × Q; MR = ΔTR ÷ ΔQ; AR = TR ÷ Q; Under monopoly, MR < AR for all units after the first.
Linear demand and MR: If P = a − bQ, then MR = a − 2bQ; MR has the same intercept and twice the slope.
Profit: Profit = (AR − AC) × Q = TR − TC; Abnormal profit if AR > AC; loss if AR < AC.
Monopoly vs perfect competition: Monopoly: P > MR = MC; Perfect competition: P = MR = MC; Use this to compare the two quickly.
Third-degree discrimination rule: Set MR₁ = MR₂ = MC; The market with less elastic demand gets the higher price.

How to solve Monopoly and Price Discrimination questions

Use this order for any monopoly question, whether it is theory or a numerical.

1Identify the market. One seller, no close substitutes and barriers to entry mean monopoly.
2Write down or find the demand (AR) function or schedule. Remember that price is the same as AR.
3Find MR. For a schedule, use MR = ΔTR ÷ ΔQ. For P = a − bQ, use MR = a − 2bQ.
4Set MC = MR and solve for Q. Check that MC is rising or cutting MR from below.
5Put this Q into the demand function to get the price. Do not read price from the MR value.
6If asked about profit, compute TR − TC or (P − AC) × Q.
7For price discrimination questions, check the condition: separable markets, different elasticities, no resale. Then match the type to the situation.

Quickest way: Option-elimination for monopoly MCQs

When to use it: Use this in the objective paper when a numerical or concept MCQ has four close options and you have about a minute.

Check which option cannot be right. Any option where price is below MR, or where output is set at P = MC, is wrong for a monopolist.
For numericals, solve MC = MR for Q first. Then test the options for Q, and calculate P only if needed.
With P = a − bQ, remember MR hits zero at Q = a ÷ 2b. Equilibrium Q must be below that when MC is positive.
Match price discrimination questions by keywords: each buyer's maximum price is first degree, quantity blocks are second degree, groups or locations are third degree.
If a numerical needs more than two minutes, skip it. A wrong answer costs 0.25 marks.

Common mistakes in Monopoly and Price Discrimination

Reading the price from the MR curve instead of the demand curve.
The equilibrium output is found using MR, so students stop there.
Fix: After MC = MR gives Q, always go up to the AR (demand) curve to get P.
Using P = MC for a monopolist.
This condition is learned for perfect competition and gets mixed up.
Fix: For monopoly, write MR = MC. Price will be above MC.
Writing MR = a − bQ when demand is P = a − bQ.
Students forget MR has twice the slope.
Fix: Write MR = a − 2bQ. Check with a quick two-point example.
Saying a monopolist always earns abnormal profit.
Textbook diagrams show profit, so it seems guaranteed.
Fix: Profit depends on AR versus AC. If AC is above demand at all outputs, there is a loss.
Mixing up the types of price discrimination.
The names sound alike and are learned as just numbers.
Fix: Link each to a key word: individual maximum price (first), quantity blocks (second), groups or markets (third).
Ignoring the conditions for price discrimination.
Students focus only on the definition.
Fix: Remember: the seller must have market power, markets must be separable so there is no resale, and elasticities must differ.

Worked examples

Example 1

A monopolist faces the demand curve P = 50 − 2Q and has a constant marginal cost of ₹10. What is the profit-maximising price? Options: (a) ₹20 (b) ₹30 (c) ₹40 (d) ₹10

Show the solution

Demand is P = 50 − 2Q, so TR = 50Q − 2Q².
MR = 50 − 4Q.
Set MC = MR: 10 = 50 − 4Q, so 4Q = 40 and Q = 10.
Put Q = 10 into demand: P = 50 − 2(10) = 30.
Check: MR at Q = 10 is 50 − 40 = 10, which equals MC. Price ₹30 is above MC.

Answer: (b) ₹30

Example 2

A firm sells to two separate markets. In Market A, demand is less elastic than in Market B. The firm can stop resale between them. To maximise profit, how should it set prices? Options: (a) Same price in both markets (b) Higher price in Market A (c) Higher price in Market B (d) Price equal to MC in both markets

Show the solution

This is third-degree price discrimination, because the markets are separable and the firm can block resale.
The firm sets MR in each market equal to the common MC.
MR = P × (1 − 1/e), where e is the elasticity of demand.
For the same MR, a market with lower elasticity needs a higher price. Market A has lower elasticity, so P is higher there.
Option (a) wastes the chance to discriminate. Option (d) is the perfect competition rule.

Answer: (b) Higher price in Market A

Example 3

A monopolist sells 4 units at ₹20 each. To sell the 5th unit, the price for all units must drop to ₹18. What is the marginal revenue of the 5th unit? Options: (a) ₹18 (b) ₹10 (c) ₹8 (d) ₹2

Show the solution

TR at 4 units = 4 × 20 = ₹80.
TR at 5 units = 5 × 18 = ₹90.
MR = 90 − 80 = ₹10.
Check: MR (₹10) is less than price (₹18), as expected under monopoly.
Option (a) is the trap: it takes price as MR.

Answer: (b) ₹10

Exam tips

Questions often ask for the difference between perfect competition and monopoly. Remember: price taker versus price maker, P = MR versus P > MR, and horizontal versus downward demand.
Expect conceptual MCQs on sources of monopoly power, such as patents, licences and natural monopoly. Learn the list.
For price discrimination, expect questions on the conditions and the type of discrimination. Read the scenario for keywords.
In numericals, solve for Q first and then P. Always check the options after calculating, so one slip does not cost marks.
Do not spend more than two minutes on one numerical. Skip and return if time is left.

Practice questions from Price Determination in Different Markets

Monopoly and Price Discrimination: frequently asked questions

How does a monopolist decide price and output?

It finds the output where MC = MR, with MC cutting MR from below. It then charges the price shown on the demand curve at that output. This price is above MR and above MC.

What are the conditions for price discrimination?

The seller must have some monopoly power. The markets must be separable so buyers cannot resell. Demand elasticity should differ between the groups or markets. Without these, discrimination will not be profitable.

What is the difference between perfect competition and monopoly?

Perfect competition has many sellers, a homogeneous product and free entry, and the firm takes the price as given. Monopoly has one seller and barriers to entry, and the firm sets price. In monopoly, price is above MC, while in perfect competition price equals MC.

Can a monopolist make a loss?

Yes. If the demand curve lies below the average cost curve at every output, the firm cannot cover its costs. In the short run it may still produce if price covers average variable cost.