Competition, Consumer Welfare, and the Social Cost of Monopoly

Issues in Competition Law and Policy

Cowles Foundation Discussion Paper No. 1528

21 Pages Posted: 2 Aug 2011 Last revised: 30 Aug 2011

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2008

Abstract

Conventional deadweight loss measures of the social cost of monopoly ignore, among other things, the social cost of inducing competition and thus cannot accurately capture the loss in social welfare. In this Article, we suggest an alternative method of measuring the social cost of monopoly. Using elements of general equilibrium theory, we propose a social cost metric where the benchmark is the Pareto optimal state of the economy that uses the least amount of resources, consistent with consumers’ utility levels in the monopolized state. If the primary goal of antitrust policy is the enhancement of consumer welfare, then the proper benchmark is Pareto optimality, not simply competitive markets. We discuss the implications of our approach for antitrust law as well as how our methodology can be used in practice for allegations of monopoly power given a history of price-demand observations.

Keywords: Competition, Consumer Welfare, Social Cost, Monopoly, Applied General Equilibrium, Pareto Optimality

JEL Classification: A10, D00, D2, D3, D4, D5, D6

Suggested Citation

Lee, Yoon-Ho Alex and Brown, Donald J., Competition, Consumer Welfare, and the Social Cost of Monopoly (August 1, 2008). Issues in Competition Law and Policy, Cowles Foundation Discussion Paper No. 1528, Available at SSRN: https://ssrn.com/abstract=1903600

Yoon-Ho Alex Lee (Contact Author)

Northwestern Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
(312) 503-2565 (Phone)

Donald J. Brown

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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