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General equilibrium, welfare and policy when firms have market power

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  • Moreno, Diego
  • Petrakis, Emmanuel

Abstract

We consider a simple private goods market economy and show that when firms have market power the equilibrium real wage, employment, real output, and labor share are less than under perfect competition. Contrary to common wisdom market concentration may have non-monotonic general equilibrium effects: the equilibrium allocation of a monopolistic economy may Pareto dominate that of an oligopolistic economy. Corporate taxes provide an appropriate instrument to pursue distributional objectives since, unlike taxes on labor income, they do not create additional deadweight losses. An appropriate minimum real wage improves efficiency and increases the labor share in a monopolistic economy, whereas in an oligopolistic economy its efficiency effects are uncertain due the existence of multiple equilibria.

Suggested Citation

  • Moreno, Diego & Petrakis, Emmanuel, 2024. "General equilibrium, welfare and policy when firms have market power," UC3M Working papers. Economics 39547, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:39547
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    References listed on IDEAS

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    1. Jaskold Gabszewicz, Jean & Vial, Jean-Philippe, 1972. "Oligopoly "A la cournot" in a general equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 4(3), pages 381-400, June.
    2. Shapiro, Carl, 2018. "Antitrust in a time of populism," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 714-748.
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    Keywords

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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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