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1、CHAPTERFOURTEENMonopolyAmonopolyisasinglefirmthatservesanentiremarket.Thissinglefirmfacesthemarketdemandcurveforitsoutput.Usingitsknowledgeofthisdemandcurve,themonopolymakesadecisiononhowmuchtoproduce.Unliketheperfectlycompetitivefirm’soutputdecision(whichha
2、snoeffectonmarketprice),themonopoly’soutputdecisionwill,infact,determinethegood’sprice.Inthissense,monopolymarketsandmarketscharacter-izedbyperfectcompetitionarepolar-oppositecases.DEFINITIONMonopoly.Amonopolyisasinglesuppliertoamarket.Thisfirmmaychoosetop
3、roduceatanypointonthemarketdemandcurve.Attimesitismoreconvenienttotreatmonopoliesashavingthepowertosetprices.Technically,amonopolycanchoosethatpointonthemarketdemandcurveatwhichitpreferstooperate.Itmaychooseeithermarketpriceorquantity,butnotboth.Inthischa
4、pterwewillusuallyassumethatmonopolieschoosethequantityofoutputthatmaxi-mizesprofitsandthensettleforthemarketpricethatthechosenoutputlevelyields.Itwouldbeasimplemattertorephrasethediscussionintermsofpricesetting,andinsomeplacesweshalldoso.BarrierstoEntryThe
5、reasonamonopolyexistsisthatotherfirmsfinditunprofitableorimpossibletoenterthemarket.Therefore,barrierstoentryarethesourceofallmonopolypower.Ifotherfirmscouldenteramarket,thenthefirmwould,bydefinition,nolongerbeamonopoly.Therearetwogeneraltypesofbarrierstoentry:
6、technicalbarriersandlegalbarriers.TechnicalbarrierstoentryAprimarytechnicalbarrieristhattheproductionofthegoodinquestionmayexhibitdecreasingmarginal(andaverage)costsoverawiderangeofoutputlevels.Thetechnol-ogyofproductionissuchthatrelativelylarge-scalefirms
7、arelow-costproducers.Inthissituation(whichissometimesreferredtoasnaturalmonopoly),onefirmmayfinditprofitabletodriveothersoutoftheindustrybycuttingprices.Similarly,onceamonopolyhasbeenestablished,entrywillbedifficultbecauseanynewfirmmustproduceatrela-tivelylowl
8、evelsofoutputandthereforeatrelativelyhighaveragecosts.Itisimportanttostressthattherangeofdecliningcostsneedonlybe‘‘large’’relativetothemarketinques-tion.Decliningcostsonsomeabsolutescalearenotnecessary.Forexample,th