Competition, Consumer Welfare, and the Social Cost of Monopoly
Issues in Competition Law and Policy
21 Pages Posted: 2 Aug 2011 Last revised: 30 Aug 2011
Date Written: August 1, 2008
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: Suggested Citation