Monopoly Revenue: Marginal and Average Revenue in Monopoly Markets

Monopoly Revenue

Understanding Monopoly Demand and Revenue

A monopoly faces a downward-sloping demand curve, meaning it must lower its price to sell additional units. This creates unique effects on the firm's revenue compared to firms in perfectly competitive markets.

• Price Effect: When a monopolist lowers its price, it earns less revenue per unit sold because the price decreases for all units sold.

• Output Effect: By selling more units at the lower price, the monopolist earns more revenue from the additional units sold.

The monopolist must balance these two effects when deciding how much to produce and at what price to sell.

Marginal Revenue in Monopoly

Marginal Revenue (MR) is the additional revenue a firm earns from selling one more unit of output. For a monopolist, marginal revenue is always less than the price of the good because the price must be reduced on all units to sell an additional unit.

• Mathematically: $MR < P$ for a monopolist.

• This is in contrast to perfect competition, where $MR = P$.

Key Revenue Formulas

• Total Revenue (TR): $TR = P \times Q$

• Average Revenue (AR): $AR = \frac{TR}{Q} = P$

• Marginal Revenue (MR): $MR = \frac{\Delta TR}{\Delta Q}$

Example: Market for Cable Subscriptions

The following table illustrates how a monopolist's revenue changes as it sells more units at lower prices:

Subscribers (Q)	Price (P)	Total Revenue (TR = P × Q)	Average Revenue (AR = TR/Q = P)	Marginal Revenue (MR = ΔTR/ΔQ)
1	80	80	80	80
2	70	140	70	60
3	60	180	60	40
4	50	200	50	20
5	30	150	30	-50

Interpretation: As the monopolist increases quantity, price falls. Marginal revenue decreases and can become negative, indicating that selling additional units at a much lower price can actually reduce total revenue.

Graphical Representation

• The demand curve is downward sloping, showing the inverse relationship between price and quantity demanded.

• The marginal revenue curve lies below the demand curve for a monopolist.

Practice Question Analysis

• a) A monopolist's demand curve is more elastic than the market demand curve. (Incorrect) The monopolist's demand curve is the market demand curve; they are the same in monopoly.

• b) For a monopoly, an increase in the quantity sold will always increase total revenue. (Incorrect) As shown in the table, total revenue can decrease if marginal revenue is negative.

• c) The barriers to market entry in perfect competition are similar to those for a monopoly. (Incorrect) Monopolies have high barriers to entry; perfect competition has none or very low barriers.

• d) A monopoly’s marginal revenue is less than its average revenue. (Correct) For a monopolist, $MR < AR$ at all positive quantities.

Summary Table: Monopoly vs. Perfect Competition

Characteristic	Monopoly	Perfect Competition
Demand Curve	Downward sloping (market demand)	Perfectly elastic (horizontal)
Marginal Revenue	Less than price ($MR < P$)	Equal to price ($MR = P$)
Barriers to Entry	High	Low or none

Additional info: In monopoly, the firm is the industry, so its demand curve is the market demand curve. Marginal revenue falls faster than price because the monopolist must lower the price on all units to sell more. Negative marginal revenue means that increasing output reduces total revenue.