Long run profitability can only be explained through the existence of effective barriers to entry. Without barriers, firms will enter any profitable industry reducing profits. While a monopolist that is unconcerned about entry will always charge the profit maximizing price, a monopoly that is concerned about potential entry may reduce price to make entry seem less profitable. The lowest such price that a firm would be willing to charge would be the zero profit price or where P=ATC, as shown below.


© 1995-1999 EconWeb - All Rights Reserved