5ECON010C Microeconomics Management
The Individual CW checks the following learning outcomes:
- Demonstrate the awareness of recent research and debates around it;
- Understand, handle and interpret key microeconomic data within the analysis;
- Demonstrate the ability to use and apply with some confidence, standard algebraic, statistical and diagrammatic representations of relevant models;
- Demonstrate the ability to critically assess and use microeconomic principles and concepts.
You are required to demonstrate the ability to write a solid literature review on "the behavior of a monopoly". In order to fulfill the task, you will be expected to:
- Stress the topicality and importance of the given topic and provide theoretical models to explain it. In this part we suggest on concentrating the pricing and production strategies of the monopoly along with social efficiency concerns from the theoretical standpoint.
- Discuss and compare recent and past empirical research implemented to studying the social efficiency of the monopoly including empirical results and corresponding conclusions of the studies.
- Critically assess the propositions of the baseline research papers and give your conclusions on the effectiveness of theoretical models in explaining practice. Here we also suggest to pick one non-Uzbek monopoly and observe its behavior over specific time period.
Answer:
Empirical study of social inefficiency of monopoly
The standard theory of microeconomics and that of industrial economics suggest that existence of monopoly power in the market leads to a net loss in welfare resulted from misallocation of resources (Jahantigh et al. 2015). This is called deadweight loss from monopoly power. In other words, the monopoly market inflicts a direct cost to welfare leading to social inefficiency.
Social inefficiency from monopoly
In the above figure resulted inefficiency from monopoly power is shown by the shaded triangle. Because of maximum market power in the market, monopolist sells a lower than socially efficient output at a higher price. Empirical studies had been conducted to compute the social cost monopoly. The past paper mostly attempted to compute social cost of monopoly by computing area of the triangle indicating welfare loss. With passes of time new papers had been developed using new approach to measure inefficiency.
The paper developed by Harberger (1954) attempted to estimate the social cost of monopoly. The article named ‘Monopoly and resource allocation’ estimated the welfare cost of monopoly in 37 selected USA industries. The researcher concluded that deviation from Pareto optimal resource allocation and resulted disruption in allocation of resources and lost in social welfare can be represented with welfare triangle (Harberger 1995). The table below summarizes the empirical evidences and finding of this paper
Evaluation of welfare cost under monopoly
The column 1 of the table represents estimated profit of the selected USA industries for a period of 5 years. Column 2 represents the profit that could have been earned if the industries got average profit instead of monopoly profit, Column 4 finally computed the welfare cost from divergence of socially efficient resource allocation (Jahantigh et al. 2015) The paper finally concluded that for the 37 selected USA industries, welfare loss from monopoly for a period between 1924 and 1929 was nearly 8 percent of the national income.
Posner in his paper in 1974 however stated that the welfare loss arising from monopoly power is not restricted to the welfare triangle. The opportunity cost for investing resources and maintaining monopoly power needs to be considered as well. Harberger estimated the deadweight loss of monopoly power constituted 0.1 percent of Gross National Product (Posner 1975). A similar result is obtained in the paper developed by Schwartzman in 1960.
The methods used in these paper were criticized as estimates were based only on increase of monopoly price. A more relevant approach is to include elasticities of demand at every prices along the demand curve. Using this approach, the paper found social loss of monopoly in the airline industry to be 92 percent of industry’s revenue.
A different approach named Leibenstein approach had been used to estimate welfare cost of monopoly in the paper developed by Jahantigh et al. in 2015. The estimates were based on data on concentrated industries of Iran from 1996 to 2006. The new approach believed that social inefficiency of monopoly arises from operation of monopolist at safe margin. The industries considered in the paper include "manufacture of tobacco products, recycling, mnufacture of medical, precision and optical instruments, watches and clocks, manufacture of coke, refined petroleum products and nuclear fuel, manufacture of fabricated metal products, except machinery and equipment (Jahantigh et al. 2015). The estimated social cost for these industries is equivalent to respect total sales percent of 100.47, 54.701, 41.039, 39.509 and 31.24.
References
Harberger, A.C., 1995. Monopoly and resource allocation. In Essential Readings in Economics (pp. 77-90). Palgrave, London.
Jahantigh, F., Tash, S., Nabi, M. and Pahlavani, M., 2015. Evaluation of Social Cost of Monopoly in Iranian Industries: Leibenstein Approach. Iranian Journal of Economic Studies, 4(1), pp.1-26.
Memarnejad, A., 2013. The Welfare Cost of Monopoly in Iranian Telecommunication Industry. Iranian Journal of Applied Economics, 4(3), 83-107.
Posner, R.A., 1975. The social costs of monopoly and regulation. Journal of political Economy, 83(4), pp.807-827.
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