INTRODUCTION As was illustrated in Chapter 2, monopoly in a market can result in an economy not achieving a Paretian optimum. A Kaldor–Hicks loss occurs because in order to maximize its proﬁt a monopolist raises the price of its product above its marginal cost of production. A monopolist fosters scarcity of the monopolized good in order to increase its proﬁt. Consumers (buyers) are economically disadvantaged as a result. Economists have traditionally argued that economic scarcity will be greater under monopoly than if greater market competition is present. More speciﬁcally, it is often argued that monopoly will result in greater economic scarcity than if perfect competition prevails. But as will be seen in this chapter, monopoly may be superior to perfect competition in stimulating economic growth and thereby reducing scarcity. Also a monopoly may be advantageous when decreasing costs of production occur. In this case, demand for the product could be met at least cost by one supplier. Just as perfect competition is an ideal or abstract market type, so too is monopoly. The diﬃculties of deﬁning monopoly and measuring monopoly power and the pitfalls of various measures are discussed in this chapter. The traditional proﬁt-maximizing model of monopoly, assuming the absence of entry, is outlined ﬁrst and the consequences of a monopolist’s behaviour for consumers’ surplus are explored. The extent of losses in consumers’ surplus as a result of monopoly compared to the alternative of perfect competition is shown in a static setting...
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