ABSTRACT
This chapter explores two key market structures—monopoly and monopolistic competition—where firms face downward-sloping demand and have pricing power. We begin with monopoly, examining how a single firm maximizes profit by setting quantity where marginal revenue equals marginal cost, and how this creates deadweight loss by restricting output and raising prices. We present both analytical and numerical examples, introduce the Lerner Index as a measure of market power, and explain how elasticity of demand shapes optimal pricing. The chapter then introduces monopolistic competition, a model of differentiated products with free entry. In the short run, firms earn profits, but entry drives profits to zero in the long run. We extend the model to account for firm heterogeneity in productivity and show how selection and reallocation determine market outcomes. Empirical evidence on total factor productivity (TFP), firm size, and survival supports these models, especially in trade and industrial organization contexts.
