Roy's Identity and Monopoly Welfare Loss

Norman J. Ireland

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: The debate concerning the extent of monopoly welfare loss long dominated by the analysis of Harberger has been revieved with the contributions of Tullock and Posner on the one hand, and Cowling, Cowling and Mueller and Kay on the other. The thesis proposed by Tullock and Posner is that "profit" is essentially a welfare loss because firms compete for monopoly profits and thus wast rescources. Also in this industry of chasing monopoly profits only normal profits are earned on the average. An example is when n firms undertake the same research in order to develop a new product. The first firm to succeed patents the product and has a monopoly. In a crude form, the arguement would be that the number of competing firms n would solve the equation : n times the expected research cost equals the expected monopoly profits of owning the patent. Obviously this is an extreme argument. There may be barriers to entry into such competition, and also risk aversion may reduce the equilibrium number of competitors. Also the new commodity may be made available earlier thus increasing welfare the larger the value of n. Nevertheless the Tullock-Posner thesis is useful as a polar case for the discussion of the social costs of monopoly. As Posner asserts "D (lost consumer surplus) is only a small fraction of D + L (lost consumer surplus plus monopoly profit)... The social costs measured by L are unaffected by the existence of second-best problems".

Pages: 18 pages
Date: 1977
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:115

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