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1、CHAPTERFOURTEENMonopolyAmonopolyisasingle?rmthatservesanentiremarket.Thissingle?rmfacesthemarketdemandcurveforitsoutput.Usingitsknowledgeofthisdemandcurve,themonopolymakesadecisiononhowmuchtoproduce.Unliketheperfectlycompetitive?rm’soutputdecision(whichha
2、snoeffectonmarketprice),themonopoly’soutputdecisionwill,infact,determinethegood’sprice.Inthissense,monopolymarketsandmarketscharacter-izedbyperfectcompetitionarepolar-oppositecases.DEFINITIONMonopoly.Amonopolyisasinglesuppliertoamarket.This?rmmaychoosetop
3、roduceatanypointonthemarketdemandcurve.Attimesitismoreconvenienttotreatmonopoliesashavingthepowertosetprices.Technically,amonopolycanchoosethatpointonthemarketdemandcurveatwhichitpreferstooperate.Itmaychooseeithermarketpriceorquantity,butnotboth.Inthischa
4、pterwewillusuallyassumethatmonopolieschoosethequantityofoutputthatmaxi-mizespro?tsandthensettleforthemarketpricethatthechosenoutputlevelyields.Itwouldbeasimplemattertorephrasethediscussionintermsofpricesetting,andinsomeplacesweshalldoso.BarrierstoEntryThe
5、reasonamonopolyexistsisthatother?rms?nditunpro?tableorimpossibletoenterthemarket.Therefore,barrierstoentryarethesourceofallmonopolypower.Ifother?rmscouldenteramarket,thenthe?rmwould,byde?nition,nolongerbeamonopoly.Therearetwogeneraltypesofbarrierstoentry:
6、technicalbarriersandlegalbarriers.TechnicalbarrierstoentryAprimarytechnicalbarrieristhattheproductionofthegoodinquestionmayexhibitdecreasingmarginal(andaverage)costsoverawiderangeofoutputlevels.Thetechnol-ogyofproductionissuchthatrelativelylarge-scale?rms
7、arelow-costproducers.Inthissituation(whichissometimesreferredtoasnaturalmonopoly),one?rmmay?nditpro?tabletodriveothersoutoftheindustrybycuttingprices.Similarly,onceamonopolyhasbeenestablished,entrywillbedif?cultbecauseanynew?rmmustproduceatrela-tivelylowl
8、evelsofoutputandthereforeatrelativelyhighaveragecosts.Itisimportanttostressthattherangeofdecliningcostsneedonlybe‘‘large’’relativetothemarketinques-tion.Decliningcostsonsomeabsolutescalearenotnecessary.Forexample,th
