Unlike the perfectly competitive firms of Chapter 8, firms with market power don’t just choose the quantity they supply at some fixed price determined by the market. Monopolies and other types of firms with market power have the ability to influence the prices of their goods. As a result, they produce at the profit-maximizing quantity where MR = MC. This production level is lower than the quantity a perfectly competitive market would produce, leading to a higher market price, more producer surplus, less consumer surplus, and deadweight loss. To raise consumer surplus and reduce deadweight loss, governments often intervene through direct price regulation and antitrust laws to reduce firms’ market power. On the other hand, governments also sometimes encourage market power to promote product innovation, such as through the issuance of patents, trademarks, and copyrights.

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Even though the firms we’ve studied in this chapter have the ability to set the price of their products, they are still limited in one important aspect of pricing. In particular, we assumed that if a firm increased the quantity it produces, this would lead to a decrease in the price on every unit of the good sold. But what if a firm could sell its product at different prices to different types of consumers? We discuss this use of a firm’s market power, a strategy broadly categorized as price discrimination, in Chapter 10.