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Critical Loss Of Social Welfare Under Monopoly

Author

Listed:
  • Nicolae Marius Jula

    ("Nicolae Titulescu" University of Bucharest)

  • Bogdan Buneci

    (Ecological University of Bucharest)

Abstract

If the firm holds a certain market power (Lerner index is positive), then the company's market presence generates a welfare loss. On the one hand, this loss is due to the contraction in demand as a result of practicing a higher price than the competitive price because the higher price discourages some buyers to purchase the product. Welfare loss is given by the reduction of overall satisfaction with the one of the lost consumers. On the other hand, firms can use the resources generated by the monopoly situation to try to obtain legal protection from the government against potential competitors. Rent-seeking means all costs incurred by firms to get the state to promote legislation to create a monopoly or to maintain or strengthen the existing situation. In this paper, we try to calculate the size of the welfare deadweight loss, due of both the monopoly's inefficient resource allocation and rent-seeking activities.

Suggested Citation

  • Nicolae Marius Jula & Bogdan Buneci, 2013. "Critical Loss Of Social Welfare Under Monopoly," Working papers 06, Ecological University of Bucharest, Department of Economics.
    • Handle: RePEc:eub:wpaper:2013-06
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    References listed on IDEAS

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    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    2. David Encaoua & Roger Guesnerie, 2006. "Politiques de la Concurrence," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00177629, HAL.
    3. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919.
    4. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-827, August.
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    Cited by:

    1. Ismar Velic & Ljerka Cerovic & Dario Maradin, 2018. "Monopoly Exploitation and Rent-Seeking as an Inevitability of Capital Concentration," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(4), pages 552-564, April.

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    More about this item

    Keywords

    market power; welfare loss; Harberger triangle; rent-seeking; Tullock hypothesis; deadweight loss;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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