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The Quiet Life of a Monopolist: The Efficiency Losses of Monopoly Reconsidered

Author

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  • Jun Chen

    (Department of Human Resources and Skills Development, Government of Canada, Ottawa K1A 0J9, Canada)

  • Zhiqi Chen

    (Department of Economics, Carleton University, Ottawa K1S 5B6, Canada)

Abstract

We study the efficiency losses of monopoly in a model where the firm¡¯s total cost of production decreases with the manager¡¯s effort to control cost. In contrast to the existing analyses of oligopolistic and monopolistically competitive markets that find an ambiguous relationship between competition intensity and managerial slack, we demonstrate that, under the same kind of cost condition, monopoly unambiguously reduces effort level and, in the case where ownership and control are separate, magnifies the effects of the moral hazard problem. Furthermore, under an alternative cost condition monopoly raises effort level rather than reducing it. In such a situation the separation of ownership and control may mitigate the productive inefficiency of monopoly.

Suggested Citation

  • Jun Chen & Zhiqi Chen, 2011. "The Quiet Life of a Monopolist: The Efficiency Losses of Monopoly Reconsidered," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 6(3), pages 389-412, September.
    • Handle: RePEc:fec:journl:v:6:y:2011:i:3:p:389-412
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    File URL: http://journal.hep.com.cn/fec/EN/10.1007/s11459-011-0139-z
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    1. is not listed on IDEAS
    2. Hüschelrath, Kai, 2008. "Is it Worth all the Trouble? The Costs and Benefits of Antitrust Enforcement," ZEW Discussion Papers 08-107, ZEW - Leibniz Centre for European Economic Research.

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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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