Fundamentals of Business Economics and Management · Forms of Market

Monopoly and Price Discrimination for CMA Foundation

Updated 10 October 2026 · Fact-checked

A monopoly is a market with one seller, no close substitutes and barriers to entry. The monopolist maximises profit where MR = MC with MC cutting MR from below, then reads the price from 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 a single seller of a product that has no close substitute. The firm is the industry. Entry by new firms is blocked, so the seller can influence price. This makes the monopolist a price maker, unlike a firm in perfect competition, which is a price taker.

Monopoly power comes from several sources: control over a key raw material, patents and copyrights, government licences or franchises, large economies of scale that make one firm the cheapest producer (a natural monopoly such as a local utility), and sometimes strong control over distribution.

The monopolist faces the whole market demand curve. It slopes downward. To sell more, the firm must cut price, and the cut applies to all units sold. So marginal revenue (MR) is less than average revenue (AR = price) and the MR curve lies below the AR curve. With a straight-line demand curve, the MR curve falls twice as steeply as AR.

For equilibrium, the monopolist produces where MR = MC, and MC must cut MR from below. Price is then found by going up to the AR curve at that output. Because price is above MC, the monopolist can earn supernormal profit even in the long run, since new firms cannot enter. Profit is not guaranteed in the short run: if price falls below average cost, there is a loss.

Price discrimination means selling the same product at different prices to different buyers, where the price difference is not due to cost differences. It is a monopolist's way to capture more consumer surplus. It works only if the seller can separate markets, buyers cannot resell, and demand elasticity differs across markets. It is called first, second or third degree based on how finely the seller can charge.

Key formulas to remember

Profit-maximising condition: MR = MC, with MC cutting MR from below; Gives the equilibrium output. Read price from the AR (demand) curve, not from MR or MC.
Monopoly price relation: Price (AR) > MR, and at equilibrium Price > MC; Shows monopolist charges above marginal cost. In perfect competition P = MR = MC.
Marginal revenue: MR = TR(n) − TR(n−1), or MR = ΔTR ÷ ΔQ; MR falls faster than AR because a price cut applies to all units.
Linear demand and MR: If AR = a − bQ, then MR = a − 2bQ; Valid only for straight-line demand. MR cuts the quantity axis at half the AR intercept.
Total profit: Profit = (AR − AC) × Q = TR − TC; Use AC at the equilibrium output.
Price discrimination in third degree: Allocate output so that MR₁ = MR₂ = MC; The market with less elastic demand gets the higher price.
Price discrimination conditions: Separable markets + no resale + different elasticities; All three are needed for it to be profitable.

How to solve Monopoly and Price Discrimination questions

Use this method for any question on monopoly features, equilibrium or price discrimination.

1Identify the market: one seller, no close substitutes, barriers to entry means monopoly.
2If it is a theory question, recall the feature or source of monopoly power that matches the wording.
3For a numerical question, compute or note TR, MR and MC at each output level.
4Find the output where MR = MC, checking that MC is rising and cuts MR from below.
5Read the price from the demand (AR) curve or demand schedule at that output.
6Compute profit as (price − average cost) × output.
7For price discrimination, identify the degree: one price per buyer is first, block pricing is second, separate markets is third.
8Check the conditions: separable markets, no resale, different elasticities.

Quickest way: MR = MC, then read the price from demand

When to use it: Use for MCQs that give a schedule or a linear demand equation and ask for price, output or profit.

For a schedule, find MR for each row, then spot the row where MR equals MC.
For AR = a − bQ with constant MC = c, set a − 2bQ = c and solve for Q.
Put Q back in AR = a − bQ to get price. Never use MR as the price.
Profit = (P − AC) × Q. If AC is constant and equal to MC, use (P − c) × Q.
Eliminate options that show price equal to MC or price equal to MR, since these suit perfect competition.

Common mistakes in Monopoly and Price Discrimination

Taking the price from the MR = MC point instead of the demand curve.
Students copy the perfect competition habit where P = MR = MC.
Fix: After finding Q, always go up to AR. Price is AR at that Q.
Writing MR = a − bQ for linear demand.
Students forget MR has twice the slope of AR.
Fix: Remember MR = a − 2bQ for a straight-line demand curve.
Saying a monopolist always earns supernormal profit.
Barriers to entry make profit sound guaranteed.
Fix: Say it can earn supernormal profit in the long run. It can make a loss if demand is weak relative to cost.
Saying a monopolist can fix both price and quantity independently.
The word price maker is read too literally.
Fix: The firm chooses one. The demand curve fixes the other.
Treating any price difference as price discrimination.
Students ignore the cost angle.
Fix: It is discrimination only when the same product is sold at different prices for reasons other than cost.
Mixing up the degrees of price discrimination.
The names sound similar.
Fix: First degree: each buyer pays the maximum they would pay. Second: price by quantity blocks. Third: different prices in separate markets.

Worked examples

Example 1

A monopolist faces demand P = 100 − 2Q and has constant marginal cost ₹20 and no fixed cost. Find the profit-maximising output, price and profit.

Show the solution

AR = P = 100 − 2Q, so TR = 100Q − 2Q².
MR = 100 − 4Q.
Set MR = MC: 100 − 4Q = 20, so 4Q = 80 and Q = 20.
Price = 100 − 2 × 20 = ₹60.
Constant MC of ₹20 means AC = ₹20.
Profit = (60 − 20) × 20 = ₹800.

Answer: Output 20 units, price ₹60, profit ₹800.

Example 2

Which of the following is a condition for successful price discrimination? (A) Buyers can resell the product easily (B) Markets can be separated and demand elasticities differ (C) Demand is equally elastic in all markets (D) The product is sold under perfect competition

Show the solution

Price discrimination needs the seller to keep markets apart, so easy resale (A) defeats it.
It pays only when elasticities differ, so (C) is wrong.
It needs market power, so perfect competition (D) is wrong.
Option (B) states two real conditions.

Answer: (B)

Exam tips

Questions often ask for a feature or source of monopoly power. Learn the list: raw material control, patents, licences, scale economies.
For numbers, use MR = MC first and read price from demand. Options with price equal to MR are traps.
In comparison questions, remember monopoly has P > MC while perfect competition has P = MC.
Learn the three degrees of price discrimination by one-line definitions and match them to examples.
There is no negative marking, so attempt every question and eliminate wrong options first.

Practice questions from Forms of Market

Monopoly and Price Discrimination in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Monopoly and Price Discrimination: frequently asked questions

How does a monopolist determine price and output?

It picks the output where MR = MC, with MC cutting MR from below. Then it sets the price from the demand curve at that output. The price is higher than MC.

What is the difference between monopoly and perfect competition?

A monopoly has one seller, entry barriers and a downward-sloping demand curve, so it is a price maker. Perfect competition has many sellers, free entry and a horizontal demand curve for each firm, so it is a price taker. A monopoly has P > MR, while a perfectly competitive firm has P = MR.

What are the degrees of price discrimination?

First degree charges each buyer the maximum price they would pay. Second degree charges different prices for different blocks of quantity. Third degree charges different prices in separate markets, such as by age, place or time.

What are the conditions for price discrimination?

The seller needs market power, the markets must be separable and resale between them must be impossible. Demand elasticity must also differ across markets. Without these, buyers would shift to the cheaper market.

Can a monopolist earn a loss?

Yes. If price at the MR = MC output is below average cost, the monopolist makes a loss. Barriers to entry only protect it from new rivals, not from weak demand.