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Chapter 8
Monopoly
FIGURE 8.2 Possible Industry Demand Curves The industry demand curve facing a monopolist might be D1, D2, or D3. Only curve D1 affords the opportunity for significant economic profits.
Dollars per Unit of Output D1
D3
AC
D2
Output
Barriers to Entry A barrier is any factor that blocks or impedes entry of new firms into a particular market. There is a wide variety of barriers to entry that are more or less important, depending on the market under consideration. In some cases, one or more of these barriers are sufficient to support a single dominant firm in the market. In others, entry barriers are not absolute but limit the market to a small number of firms. It is also useful to speak of barriers to competition—that is, factors that, while not precluding rivals from the market, insulate a given firm from direct competition. Sources of entry barriers include the following. When average cost falls significantly with increases in scale, a new firm must enter the market with a large market share to be competitive. If this addition to industry output requires a significant drop in market price, entry will be unprofitable. In so-called natural monopolies, average cost continually decreases with output, implying that a single firm achieves the lowest possible unit cost by supplying the entire market. For instance, it is
ECONOMIES OF SCALE
