linguistic:translation, structural:summarization, quality:corruption, linguistic:paraphrasing
Monopoly versus competitive markets

While monopoly and perfect competition represent the extremes of market structures there is some similarity. The cost functions are the same. Both monopolies and perfectly competitive (PC) companies minimize cost and maximize profit. The shutdown decisions are the same. Both are assumed to have perfectly competitive factors markets. There are distinctions; some of the most important are as follows:

The most significant distinction between a PC company and a monopoly is that the monopoly has a downward-sloping demand curve rather than the "perceived" perfectly elastic curve of the PC company. Practically all the variations mentioned above relate to this fact. If there is a downward-sloping demand curve then by necessity there is a distinct marginal revenue curve. The implications of this fact are best made manifest with a linear demand curve. Assume that the inverse demand curve is of the form x = a − b y {\displaystyle x=a-by}. Then the total revenue curve is TR = a y − b y 2 {\displaystyle {\text{TR}}=ay-by^{2}} and the marginal revenue curve is thus MR = a − 2 b y {\displaystyle {\text{MR}}=a-2by}. From this several things are evident. First, the marginal revenue curve has the same x {\displaystyle x} -intercept as the inverse demand curve. Second, the slope of the marginal revenue curve is twice that of the inverse demand curve. What is not quite so evident is that the marginal revenue curve is below the inverse demand curve at all points (y ≥ 0 {\displaystyle y\geq 0}). Since all companies maximise profits by equating MR {\displaystyle {\text{MR}}} and MC {\displaystyle {\text{MC}}} it must be the case that at the profit-maximizing quantity MR and MC are less than price, which further implies that a monopoly produces less quantity at a higher price than if the market were perfectly competitive.

The fact that a monopoly has a downward-sloping demand curve means that the relationship between total revenue and output for a monopoly is much different from that of competitive companies. Total revenue equals price times quantity. A competitive company has a perfectly elastic demand curve meaning that total revenue is proportional to output. Thus the total revenue curve for a competitive company is a ray with a slope equal to the market price. A competitive company can sell all the output it desires at the market price. For a monopoly to increase sales it must reduce price. Thus the total revenue curve for a monopoly is a parabola that begins at the origin and reaches a maximum value then continuously decreases until total revenue is again zero. Total revenue has its maximum value when the slope of the total revenue function is zero. The slope of the total revenue function is marginal revenue. So the revenue maximizing quantity and price occur when MR = 0 {\displaystyle {\text{MR}}=0}. For example, assume that the monopoly's demand function is P = 50 − 2 Q {\displaystyle P=50-2Q}. The total revenue function would be TR = 50 Q − 2 Q 2 {\displaystyle {\text{TR}}=50Q-2Q^{2}} and marginal revenue would be 50 − 4 Q {\displaystyle 50-4Q}. Setting marginal revenue equal to zero we have

So the revenue maximizing quantity for the monopoly is 12.5 units and the revenue-maximizing price is 25.

A company with a monopoly does not experience price pressure from competitors, although it may experience pricing pressure from potential competition. If a company increases prices too much, then others may enter the market if they are able to provide the same good, or a substitute, at a lesser price. The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory".

A monopolist can extract only one premium, and getting into complementary markets does not pay. That is, the total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself. However, the one monopoly profit theorem is not true if customers in the monopoly good are stranded or poorly informed, or if the tied good has high fixed costs.

A pure monopoly has the same economic rationality of perfectly competitive companies, i.e. to optimise a profit function given some constraints. By the assumptions of increasing marginal costs, exogenous inputs' prices, and control concentrated on a single agent or entrepreneur, the optimal decision is to equate the marginal cost and marginal revenue of production. Nonetheless, a pure monopoly can – unlike a competitive company – alter the market price for its own convenience: a decrease of production results in a higher price. In the economics' jargon, it is said that pure monopolies have "a downward-sloping demand". An important consequence of such behaviour is that typically a monopoly selects a higher price and lesser quantity of output than a price-taking company; again, less is available at a higher price.