A Primer on Microeconomics, Volume II by Thomas M. Beveridge

Author:Thomas M. Beveridge
Language: eng
Format: epub
Publisher: Business Expert Press
Published: 2018-10-23T16:00:00+00:00

Figure 7.9 The nonunique “price–quantity” relationship

Monopoly in the Long Run: Long-Run Equilibrium Outcomes in Artificial Monopoly

We are now ready to turn our attention to the behavior of the “artificial” monopoly in the long run, and more particularly, in long-run equilibrium. In a natural monopoly, LRAC continues to decline because of substantial economies of scale. This is not true for the artificial monopoly—the LRAC curve is U-shaped.

In Chapter 6, we saw that in long-run equilibrium, the typical perfectly competitive firm will be driven by the entry and exit of rivals to a situation where only a normal profit will be earned. However, in monopoly, there are no rivals and economic profits can be preserved, even in long-run equilibrium.

Two possible cases can occur in long-run equilibrium. The first—unlikely, but possible—case is that the firm will earn only a normal profit. This outcome could occur, but it is important to realize that there is no mechanism in monopoly that would compel it to occur—it just would be the accidental alignment of the demand-side and supply-side conditions. The second, and more likely, case is that the firm will earn economic profits.

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