If an incumbent monopolist supplies Q. at price P

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Presentation transcript:

If an incumbent monopolist supplies Q. at price P If an incumbent monopolist supplies Q* at price P*, then entry is unprofitable-- the residual demand curve lies everywhere below LAC $ The sustainable case  P* LAC Residual demand D Quantity Q*

$ LAC J K N demand Q1 Q2 Q3 Quantity An entrant can offer output Q2 at price P2 and earn a normal profit. Hence entry is profitable even though it is socially inefficient The unsustainable case Be aware that the cost function is subadditive at Q3 $ LAC J K P3 P2 P1 N demand Q1 Q2 Q3 Quantity

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