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General equilibrium, welfare and policy analysis when firms have market power

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  • Moreno, Diego
  • Petrakis, Emmanuel

Abstract

We consider a market economy in which consumption goods are produced using high- and low-skilled labor. When firms have market power, the surplus, aggregate income, employment, wages and labor share are smaller than under perfect competition. Contrary to common wisdom, the monopolistic equilibrium allocation may Pareto dominate the oligopolistic equilibrium allocation. A suitable minimum wage mitigates the inefficiency and distributional biases of market power without creating unemployment. Subsidies to goods or labor, or public spending enhancing production capabilities (e.g., public education, incentives for innovation) funded with non-distortionary (e.g., corporate) taxes mitigate inefficiency and distributional biases. Entry does not correct by itself the effects of market power.

Suggested Citation

  • Moreno, Diego & Petrakis, Emmanuel, 2026. "General equilibrium, welfare and policy analysis when firms have market power," Journal of Economic Behavior & Organization, Elsevier, vol. 246(C).
    • Handle: RePEc:eee:jeborg:v:246:y:2026:i:c:s0167268126001174
    DOI: 10.1016/j.jebo.2026.107531
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    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D6 - Microeconomics - - Welfare Economics
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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