Wood and associates july 2004 this paper can be downloaded without charge from the social science research network electronic paper collection at. N2 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. What is the difference between private and social costs. Much of this can be summarized by considering posners statement that at the margin, the cost of obtaining a monopoly is exactly equal to the expected profit of being a monopolist. In a monopoly market, factors like government license, ownership of resources, and patent and high starting cost make an entity a single seller of goods. Once the patents were obtained, at whatever cost, the future monopoly rents were achieved and further expenditure by anyone was pointless. Assuming profit maximising behaviour we can define the implied. Economic theorists model individual decisionmaking as measurement of costs and. Accordingly, a clear understanding and a workable definition of the social cost of monopoly are essential in shaping and implementing antitrust law. The social cost of monopoly therefore includes the expected sum of firms rentseeking and rentdefending outlays, consumers surplusdefending outlays, and the deadweight loss. In the textbook case of a monopoly, there is only one firm producing the good. Brown conventional deadweight loss measures of the social cost of monopoly ignore, among other things, the social cost of inducing competition and marginal cost pricing, and thus cannot accurately capture the loss in social welfare. An interesting question is how consumers surplusdefending efforts affect firms rentseeking outlays and the social costs of monopoly.
In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. Social costs of monopoly and regulation by richard a. That study found that the social cost of a monopoly price greater than the optimal price is between 50 and 100 percent of the monopolists revenue. It ensures consistent delivery of a product or service that has a very high upfront cost. Definition of price discrimination the business practice of selling the same good at different prices to different customers.
In this case, the intersection of the marginal social cost curve and the demand curve occurs at. Its very expensive to build new electric plants or dams, so it makes economic sense to allow monopolies to. The social costs of monopoly power university of warwick. In practice, the social cost of monopoly power is likely to exceed the deadweight loss triangles b and c in fig. Social cost definition economics online economics online. When assessing the overall impact of its commercial actions in. This is the deadweight loss from monopoly, and in conventional analysis the only social cost of monopoly. When private and external costs are paid by the firm, the marginal social cost curve dotted red line is created by adding the marginal external costs to the marginal private costs. In other words, it is the sum of personal and external costs. The social cost is used in the social costbenefit analysis of the overall impact of the operations of the business on the society as a whole and do not normally figure in the business decisions. Dead weight loss social cost under monopoly in case of increasing marginal cost. At the same time, however, the monopoly is earning profit from charging this high price. A natural monopoly is a type of monopoly that arises due to natural market forces. Given that pure monopolies are rare, regulators and other agencies often consider the extent of monopoly power in a market to determine whether intervention should take place monopoly power is the extent to which a firm can influence and even set the market price or influence the quantity supplied.
Competition, consumer welfare, and the social cost of monopoly yoonho alex lee and donald j. Under perfect competition, consumer surplus is given by the area of triangle, abd, in figure. We have seen that a monopoly, in contrast to a competitive firm, charges a price above marginal cost. Social cost in economics may be distinguished from private cost. Answer false diff 1 topic the social cost of monopoly. Economic theory suggests that monopoly results in a social loss because output is restricted below its optimal level, meaning that marginal benefit and marginal. All these factors restrict the entry of other sellers. Inefficient externalities defined, vs grubers definition. A monopolist might be better placed to exploit increasing returns to scale leasing to an equilibrium that gives a higher output and a lower price than under competitive conditions. The social costs of monopoly and regulation richard a. Allocative efficiency is an economic concept regarding efficiency at the social or societal level. Definition 3 farmers lobbying the government for agricultural price supports are engaging in rentseeking behavior. Posner university of chicago law school and national bureau of economic research this paper presents a model and some highly tentative empirical estimates of the social costs of monopoly and monopolyinducing regulation in the united states. President reagans first council of economic advisers specifically defined.
Assuming profit maximising behaviour we can define the implied price elasticity. So this monopolist could just keep earning these returns period after period. Monopoly definition economics online economics online. Monopoly behavior the profit maximization condition leads to a very useful equation. The rule of profit maximization in a world of perfect. Monopoly firms produce and sell a quantity of output below the level that maximizes total surplus. In a realworld monopoly, such as the operating system monopoly, there is one firm that provides the overwhelming majority of sales microsoft, and a handful of small. A familiar measure of the social cost of monopoly is the deadweight loss triangle the social surplus unrealiz ed due to monopoly pricing. Rent seeking and the social costs of monopoly alan dunne. Recall from that the return functions are particularly simplea. The cost of monopoly that is borne by consumers is illustrated in figure.
Competition, consumer welfare, and the social cost of monopoly. The definition for the word monopoly in social studies is exclusive control of a commodity or service in a particular market, or a control that makes possible the manipulation of prices. Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. Definition 2 public choice theory states that government officials act in their own selfinterest when setting policies and regulations. The cost to the consumer of a monopolistic market structure is the reduction in consumer surplus that results from monopoly output and price decisions.
A previous work found that the gross social cost of monopoly pricing can be related to the revenue received by the monopolist. This is known as the deadweight welfare loss or the social cost of monopoly and is equal to the area abc. Posner reconsidered,journal of political economy,93, 4106. A pure monopoly rarely occurs, but there are instances where companies own a large portion of the market share, and anttrust laws apply. Monopoly has social costs because produces less and charges a higher price, p is greater than mc and implies economic inefficiency, too few resources are being used in the monopoly industry and too many are used elsewhere. A market structure refers to the features of a market organization that defines the nature of competition and. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost. For example in the case of the patent and were just talking about xerox, xerox had protection in those. In our above analysis of deadweight welfare loss or, in other words, social cost of monopoly due to reduction in output and hike in the price by a monopolist as compared to the perfectly competitive equilibrium, it has been assumed that marginal cost curve is a horizontal straight line. The welfare cost of monopoly is measured by the area on a graph between the demand curve and the marginal cost curve for the units that, due to. From the stans point of consumers, this high price makes monopoly undesirable. The social cost of monopoly was methodologically introduced by harberger 1954 as the welfare triangle, abc, which is called in the literature as deadweight loss, and harberger triangle, or welfare loss, that is shown in figure i.
A company with a natural monopoly might be the only provider or. The social cost of monopoly power donald brown yale university g. The expense to an entire society resulting from a news event, an activity or a change in policy. A familiar measure of the social cost of monopoly is the deadweight loss triangle. Monopoly creates a social cost, called a deadweight loss, because some consumers who would be willing to pay for the product up to its marginal cost mc, are not served. Competition, consumer welfare, and the social cost of. If firms are differentially situated in terms of the ease with which monopoly can be obtained, then they will earn rents that will not represent social costs fisher, 1985, p.
T1 competition, consumer welfare, and the social cost of monopoly. This contrasts with a monopsony which relates to a single entitys control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market. Monopoly with linear demand and constant marginal cost coase. Why is there a social cost to monopoly power answers.
The loss suffered by those who continue to buy the product at the higher cost is regarded merely as a transfer from consumers to owners of the monopoly seller and has not previously been factored into the social costs of monopoly. Because of such expenditures, the social cost of monopoly is said to be the sum of. But by definition in our monopoly, the definition of a monopoly market is theres no threat of entry. Private costs refer to direct costs to the producer for producing the good or service. Reasons why monopolists do not exhibit resource allocative efficiency.