Comparative statics of monopoly pricing

This note seeks to fill a small but significant gap in the literature on monopoly pricing. We ask how an expansion of market demand affects the resulting monopoly price. Specifically, if consumers’ (aggregate) willingness-to-pay increases uniformly by some amount, will the monopoly price increase, and, if so, by how much? It is readily verified that in case of a linear demand curve a uniform shift induces a price increase at the rate of one half of the size of the shift. On the other hand, the resulting monopoly price will decrease when such a demand shift is applied to a constant elasticity demand curve.1 Our analysis identifies conditions on the underlying demand curve which predict both the sign and the magnitude of the resulting price change. Our results are applicable to a range of issues in the industrial organization literature. In particular, these include changes in consumer preferences, a reduction of the monopolist’s cost, or a lower excise tax for the good in question.