Sources of market power( To maximize profits the monopolist produces where marginal revenue equals marginal cost The role of economic profits is to provide a signal regarding the social value of interindustry resource allocation. Positive economic profits in a market indicates that the social value of resources producing that product exceeds their value in their next best alternative use We expect that economic profits will attract entrants: entrepreneurs have an incentive to bid resources away from alternative uses and enter If the new entrants have access to the same technology as the incumbent monopolist we would expect that over time, the incumbents market power would be eroded and eventually eliminated. Entrants provide alternative sources of supply to which consumers can substitute, reducing the profitability of raising price above marginal cost. If entry is easy-there are no barriers to entry-then in the long run market power is eliminated by entry and the equilibrium price pc should equal marginal cost and economic profits will be zero. Market power-when there is not relatively large economies of scale-can only persist in the long run if there are barriers to entry that limit the extent of competition If there are economies of scale then free entry will eliminate economic profits and firms will only be able to exercise sufficient market power to ensure that their economic profits are zeroSources of market power (1) • To maximize profits, the monopolist produces where marginal revenue equals marginal cost. • The role of economic profits is to provide a signal regarding the social value of interindustry resource allocation. Positive economic profits in a market indicates that the social value of resources producing that product exceeds their value in their next best alternative use. We expect that economic profits will attract entrants: entrepreneurs have an incentive to bid resources away from alternative uses and enter. If the new entrants have access to the same technology as the incumbent monopolist we would expect that, over time, the incumbent’s market power would be eroded and eventually eliminated. Entrants provide alternative sources of supply to which consumers can substitute, reducing the profitability of raising price above marginal cost. If entry is easy-there are no barriers to entry-then in the long run market power is eliminated by entry and the equilibrium price pc should equal marginal cost and economic profits will be zero. Market power-when there is not relatively large economies of scale-can only persist in the long run if there are barriers to entry that limit the extent of competition. If there are economies of scale, then free entry will eliminate economic profits and firms will only be able to exercise sufficient market power to ensure that their economic profits are zero