Introduction

In this chapter we analyze the supply and pricing decisions of a pure, singleproduct monopolist facing a large number of price-taking buyers. We take the firm's choice of product as given and assume that consumers know all about product characteristics and quality. Moreover, we assume that the monopolist's market is sufficiently self-contained to allow us to neglect the strategic interdependency between markets. The strategic interdependency between markets is the subject matter of the theory of oligopoly with product differentiation.

Monopolies do exist. In the early days of photocopying, Rank Xerox was the exclusive supplier – some still use “xeroxing” as a synonym for “photocopying.” Postal and rail services are (or have been) monopolized (things are changing fast in these sectors), and so are public utilities (gas and electricity) and computer operating systems, to name just a few. One can even find inconspicuous products that are subject to monopolization. For example, in Germany matches were exclusively supplied by a single Swedish supplier who had acquired a monopoly license from the German government during World War I, when the German government was hard pressed for foreign currencies. Similarly, gambling licenses are often issued by states to raise revenue. Moreover, there are many local monopolies, like the single hardware store in a small community, the bus line exclusively served by Greyhound, or the flight route, say from Ithaca to New York City, served by a single airline.