Like the perfectly competitive firm, a monopolist has three interrelated optimization problems. Attention is focused on the Output Profit Max problem because that is where the essential difference lies between a PC firm and a monopoly. Of course, we know that via consistency, monopoly power manifests itself on the input side also. A monopoly will produce less than a PC firm and, in turn, hire less labor and capital.

Definition and Issues

A monopoly is defined as a firm that is the sole seller of a product with no close substitutes. The definition is inherently vague because there is no clear demarcation for what constitutes a close substitute.

Consider this example: Your local cable provider may have an exclusive agreement to provide cable TV in your community. You could argue that your cable provider is a monopoly because it is the sole seller of cable TV. But what are the substitutes for cable TV?

Years ago, cable TV was the only way to access subscription channels such as ESPN and HBO. Commercial broadcasts (with national broadcasters such as ABC, NBC, and CBS and local channels) were a poor substitute for cable TV. In this environment, cable TV would be a good example of a monopoly.