Competition, Consumer Welfare, and the Social Cost of Monopoly

21 Pages Posted: 11 Aug 2005

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

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: Monopoly power, Antitrust economics, Applied general equilibrium

JEL Classification: D42, D58, D61, L12, L41

Suggested Citation

Lee, Yoon-Ho Alex and Brown, Donald J., Competition, Consumer Welfare, and the Social Cost of Monopoly (July 2005). Cowles Foundation Discussion Paper No. 1528, Available at SSRN: https://ssrn.com/abstract=781226

Yoon-Ho Alex Lee

Northwestern Pritzker School of Law ( email )

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

Donald J. Brown (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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