Hi I would like to know why for a natural duopoly, it’s assumed that price is equal to minimum Average Cost. For me it’s not necessary the case (like it’s not in Monopoly and Monopolistic competition) Thanks for your help
If price > min avg cost , there is potential for economic profit which encourages entry of new firms and increases supply. In long-run equilibrium economic profit is zero and price = min avg cost. Each firm then produces at the efficient scale and the number of firms that can exist in competitive equilibrium (theory) is determined by total demand.
I agree that this is the case for perfect competition but for monopoly for instance, it’s not the case, price is not equal to min avg cost, that’s why we have economic profit in the long run What I’m asking is why natural duopoly is not like monopoly I’m surely missing sthg here… Thanks
monopolies typically exist in capital intensive industries where the market size is small in relation to the efficient scale. if a competitor were to challenge the incumbent, the incumbent could slide down the ATC curve to produce at a lower cost and still be able to supply the entire market. the industry would then have overcapacity and it wouldnt be economically feasible for two competitors to co-exist. in that case the new entrant would have risked a huge amount of capital in a loss making venture. a duopoly is different in that both competitors already produce at minimum cost while still supplying only a portion of total demand. none would produce more than they already do since they have exhausted their scale efficiencies. would this make sense?
Thanks, that’s clear