Competition, Consumer Welfare, and the Social Cost of Monopoly

Lee, Yoon-Ho Alex and Donald Brown ()

No 1528, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: Conventional deadweight loss measures of the social cost of monopoly ignore, among other things, the social cost of inducing competition and thus cannot accurately capture the loss in social welfare. In this Article, we suggest an alternative method of measuring the social cost of monopoly. Using elements of general equilibrium theory, we propose a social cost metric where the benchmark is the Pareto optimal state of the economy that uses the least amount of resources, consistent with consumers' utility levels in the monopolized state. If the primary goal of antitrust policy is the enhancement of consumer welfare, then the proper benchmark is Pareto optimality, not simply competitive markets. We discuss the implications of our approach for antitrust law as well as how our methodology can be used in practice for allegations of monopoly power given a history of price-demand observations.

Keywords: Monopoly power; Antitrust economics; Applied general equilibrium (search for similar items in EconPapers)
JEL-codes: D42 D58 D61 L12 L41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
Date: 2005-07

Published in Issues in Competition Law and Policy, Vol. 1, Ch. 17, 2008

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