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Monopoly, economic efficiency and unemployment

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  • Zhao, Bo

Abstract

The objective of this paper is to analyze the efficiency consequences of monopoly from the perspective of an efficiency-wage model of unemployment based on Shapiro and Stiglitz (1984). An important feature of our model is that a firm can raise the probability that a shirking worker is detected by increasing its effort or investment in the monitoring of workers. Using this model we study how a monopolist's decision with regard to employment, output and monitoring is affected by exogenous variables such as job separation rate, technological advances, market size, and unemployment benefits. Furthermore, by comparing with the competitive equilibrium we find that monopoly is associated with higher unemployment rate, smaller output, and less monitoring. Surprisingly, however, monopoly does not necessarily lead to lower welfare level.

Suggested Citation

  • Zhao, Bo, 2012. "Monopoly, economic efficiency and unemployment," Economic Modelling, Elsevier, vol. 29(3), pages 586-600.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:586-600
    DOI: 10.1016/j.econmod.2012.01.001
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    References listed on IDEAS

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    1. Miles S. Kimball & John G. Fernald & Susanto Basu, 2006. "Are Technology Improvements Contractionary?," American Economic Review, American Economic Association, vol. 96(5), pages 1418-1448, December.
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    More about this item

    Keywords

    Monopoly; Efficiency loss; Unemployment; Efficiency wage;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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