The Quiet Life of a Monopolist: The Efficiency Losses of Monopoly Reconsidered
AbstractIn this paper we study the efficiency losses of monopoly by analyzing a model where a firm's total costs of production decrease with the manager's effort to control costs. We consider two separate cases with regard to ownership and control: (1) the owner of the firm manages the firm himself; and (2) the owner hires a manager to operate the firm. We demonstrate that even in the case where the owner manages the firm, the level of effort exerted by the owner-manager of a monopoly is not first-best. Interestingly, the productive inefficiency of monopoly in this case may be caused by too much rather than too little effort. In such a situation, moreover, the separation of ownership and control can mitigate the productive inefficiency of monopoly, thus raising the intriguing possibility that managerial slack can actually improve the efficiency of monopoly equilibrium. To phrase our results in Hicks'(1935) terminology, a monopolist does not necessarily live a quiet life, and a quiet life is not necessarily a bad thing from the perspective of economic efficiency.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 08-04.
Length: 35 pages
Date of creation: 02 Jun 2008
Date of revision: Sep 2011
Publication status: Published: – revised version in Frontiers of Economics in China, Vol. 6, No. 3 (September 2011), pp. 389–412
Contact details of provider:
Postal: 1125 Colonel By Drive, Ottawa Ontario, K1S 5B6 Canada
Other versions of this item:
- Jun Chen & Zhiqi Chen, 2011. "The quiet life of a monopolist: The efficiency losses of monopoly reconsidered," Frontiers of Economics in China, Springer, vol. 6(3), pages 389-412, September.
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-21 (All new papers)
- NEP-BEC-2008-12-21 (Business Economics)
- NEP-COM-2008-12-21 (Industrial Competition)
- NEP-CTA-2008-12-21 (Contract Theory & Applications)
- NEP-MIC-2008-12-21 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, vol. 75, pages 123.
- Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
- David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
- Boone, J., 2000.
2000-104, Tilburg University, Center for Economic Research.
- Flavio Delbono & Vincenzo Denicolo, 1988.
"Incentives to Innovate in a Cournot Oligopoly,"
44, Dipartimento Scienze Economiche, Universita' di Bologna.
- Nalebuff, Barry J & Stiglitz, Joseph E, 1983. "Information, Competition, and Markets," American Economic Review, American Economic Association, vol. 73(2), pages 278-83, May.
- Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
- Cowling, Keith & Mueller, Dennis C, 1978. "The Social Costs of Monopoly Power," Economic Journal, Royal Economic Society, vol. 88(352), pages 727-48, December.
- Jan Boone, 2000.
"Competitive Pressure: The Effects on Investments in Product and Process Innovation,"
RAND Journal of Economics,
The RAND Corporation, vol. 31(3), pages 549-569, Autumn.
- Boone, J., 2000. "Competitive pressure: The effects on investments in product and process innovation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-84400, Tilburg University.
- Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
- Delbono, Flavio & Denicolo, Vincenzo, 1990. "R & D investment in a symmetric and homogeneous oligopol : Bertrand vs Cournot," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 297-313, June.
- Laffont, Jean-Jacques & Tirole, Jean, 1986.
"Using Cost Observation to Regulate Firms,"
Journal of Political Economy,
University of Chicago Press, vol. 94(3), pages 614-41, June.
- Bengt Holmstrom & Paul R. Milgrom, 1985.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Cowles Foundation Discussion Papers
742, Cowles Foundation for Research in Economics, Yale University.
- Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
- Hermalin, Benjamin E., 1991.
"The Effects of Competition on Executive Behavior,"
Department of Economics, Working Paper Series
qt7m13v5dd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Schmidt, Klaus M., 1996.
"Managerial Incentives and Product Market Competition,"
CEPR Discussion Papers
1382, C.E.P.R. Discussion Papers.
- Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
- Aiginger, Karl & Pfaffermayr, Michael, 1997. "Looking at the Cost Side of "Monopoly."," Journal of Industrial Economics, Wiley Blackwell, vol. 45(3), pages 245-67, September.
- Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
- A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
- Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
- Piccolo, Salvatore & D'Amato, Marcello & Martina, Riccardo, 2008. "Product market competition and organizational slack under profit-target contracts," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1389-1406, November.
- Grossman, Sanford J & Hart, Oliver D, 1983.
"An Analysis of the Principal-Agent Problem,"
Econometric Society, vol. 51(1), pages 7-45, January.
- Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
- Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Renee Lortie).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.