Structural characteristics(4) Demsetz(1982)observed that care must be taken to ensure that an absolute cost advantage-and the implied barrier to entry-does not disappear when the assets of the firm are valued at their opportunity cost If assets are tradable, then instead of using the asset, the incumbent could sell out to a potential entrant. the rents created by this factor are an opportunity cost to the incumbent. If the asset were traded, the rents created by the asset would become capitalized in its price. The guestionthen becomes, however, whether the capitalized rents are Ricardian rents or monopoly rents(profits) In competitive markets the price is determined by the least efficient producer in the market: the marginal cost of the last unit(highest cost) supplied equals the price. Firms with lower costs earn Ricardian rents those rents are not economic profits. Rather they are a return to their superior factors of production; the market value of these factors would include these capitalized rents and a decision to use them rather than sell them requires an imputation of their opportunity cost, namely, their market value. In doing so the firm s economic profits become zero; the apparent economic profits of the firm arise from the scarcity and superiority of the factor of production, not from anything done by the firm On the other hand access to a superior factor of production may provide a firm with market power this will be the case if the scale of production at which the cost advantage is sustained is large enough that the firm can act as a price makerStructural characteristics (4) • Demsetz (1982) observed that care must be taken to ensure that an absolute cost advantage-and the implied barrier to entry-does not disappear when the assets of the firm are valued at their opportunity cost. If assets are tradable, then instead of using the asset, the incumbent could sell out to a potential entrant. The rents created by this factor are an opportunity cost to the incumbent. If the asset were traded, the rents created by the asset would become capitalized in its price. The questionthen becomes, however, whether the capitalized rents are Ricardian rents or monopoly rents (profits). • In competitive markets the price is determined by the least efficient producer in the market: the marginal cost of the last unit (highest cost) supplied equals the price. Firms with lower costs earn Ricardian rents: those rents are not economic profits. Rather they are a return to their superior factors of production; the market value of these factors would include these capitalized rents, and a decision to use them rather than sell them requires an imputation of their opportunity cost, namely, their market value. In doing so the firm’s economic profits become zero; the apparent economic profits of the firm arise from the scarcity and superiority of the factor of production, not from anything done by the firm. • On the other hand access to a superior factor of production may provide a firm with market power. This will be the case if the scale of production at which the cost advantage is sustained is large enough that the firm can act as a price maker