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Monopolists have the ability to generate economic profits in the long run because the firm has greater control over variables that affect the marketplace.
The monopolist has market revenues that are below its equilibrium price. Output is restricted in a monopoly to obtain the price point that optimizes revenues. The barriers of entry into a monopoly are high. A barrier of entry can be defined as the existence of high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business (Investopedia). A way for a company to create a monopoly is through innovation. An innovative company can create a new product and patent this product. A patent creates a monopoly that allows the firm holding the product for a maximum of 20 years of protection. An example of an industry that often uses patents to protect its products is the pharmaceutical industry. Often pharmaceutical companies abuse their monopoly power by charging outrageous prices for prescribed medicines. The justification to charge a high price is the fact that these companies incur in very high research and development cost to bring a new drug into the marketplace. “The average cost of bringing a new drug to market is $1.3 billion” (Herper).
In a monopoly the firm has greater control over due to the non-existence of competition. The customer has no option but to pay whatever price the monopolist establishes. There is no price elasticity of demand in a monopolist. The marginal revenues equal the marginal cost in a monopoly market structure. The monopolist controls price and is not dependent on the market determining price as in other economic market structures. Despite the fact that the monopolist controls price it does not make it immune to the law of supply and demand. The demand curve of a monopolist is downward slopping. A monopolist is able to achieve economic profits in the long run due to its control over factors or variables that affect
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a) Products’ physical differentiation: where size, design,
(2) Network effects-this is the effect of great number of people using a specific good in the market. The incumbents create a strong network that makes it difficult for new entrants to join. (3) Ownership of a scarce resource- an
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