[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

with marginal costs equal to those of the incumbent, will realize that once it enters,
it too must set price equal to marginal cost and therefore will be unable to recover
even a small sunk cost. Hence, it chooses not to enter. And the incumbent firm,
aware of this calculation, can charge a monopoly price unchallenged.
Wrap-Up
ENTRY DETERRENCE
Government policies: These include grants of monopoly (patents) and restrictions
on entry (licensing).
Single ownership of an essential input: When a single firm owns the entire supply
of a raw material, entry is by definition precluded.
Information: Lack of technical information by potential competitors inhibits
their entry; lack of information by consumers concerning the quality of a new entrant’s
product discourages consumers from switching to the new product, and
thus inhibits entry.
Market strategies: These include actions such as predatory pricing and excess
capacity aimed at convincing potential entrants that entry would be met with
resistance, and thus would be unprofitable.
The Importance of Imperfections
in Competition
Many of the features of the modern economy—from frequent-flier mileage awards
to offers to match prices of competitors, from brand names to the billions spent
every year on advertising—not only cannot be explained by the basic competitive
model but also are inconsistent with it. They reflect the imperfections of competition
that affect so many parts of the economy. Most economists agree that the extreme
cases of monopoly (no competition) and perfect competition (where each firm has
no effect on the market prices) are rare, and that most markets are characterized by
some, but imperfect, competition.
284 ∂ CHAPTER 12 MONOPOLY, MONOPOLISTIC COMPETITION, AND OLIGOPOLY