COMPLEMENTARY MONOPOLY AND WELFARE: IS SPLITTING UP SO BAD?*

Jolian McHardy

Manchester School, 2006, vol. 74, issue 3, 334-349

Abstract: We derive an original measure of dead‐weight loss (DWL) in an m‐sector complementary monopoly and show that with non‐collusive pricing DWL may be seriously understated if demand complementarities are ignored, even when m is small. Since DWL generally increases with m and with less collusive pricing, separating monopoly into complementary monopoly (risking reduced price collusion) may be a bad static move. To illustrate, separating Microsoft into two non‐collusive complementary monopolies may increase DWL from $4 billion to $7 billion (for 2002–3). However, we show that such a policy may be welfare improving with even relatively modest post‐separation entry and Cournot quantity competition.

Date: 2006
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