SOLUTION OF SOCIAL PROBLEMS IN
MANAGEMENT AND ECONOMY
International scientific-online conference
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THE BEHAVIOR AND THE SOCIAL COSTS OF A MONOPOLY
Saparboev Sherkhon
Student of Ma’mun University, Uzbekistan
Email: saparboyev1004@gmail.com
https://doi.org/10.5281/zenodo.15095162
Abstract:
This article examines behavior and social costs associated with
monopolies from a microeconomic perspective, emphasizing implications of
monopolistic practices on societal welfare. The primary characteristics of
monopolies are defined, setting foundation for an exploration of relevant
literature. The concept of social costs in monopoly contexts is explored,
highlighting key contributions from economists.
Key words
: Monopoly, Social Costs, Welfare Loss, Price Maker, Rent-
Monopoly Power, Microeconomics
Annotatsiya:
Ushbu maqola monopoliyalarning ijtimoiy farovonlikka
ta'sirini kuchaytiradigan monopolistik amaliyotlarning oqibatlariga e'tibor
qaratgan holda mikroiqtisodiy nuqtai nazardan monopoliyalarning xulq-atvori
va ijtimoiy xarajatlarini o'rganadi. Monopoliyalarning asosiy xususiyatlari
tasvirlangan bo'lib, bu tegishli adabiyotni o'rganish uchun asos yaratadi.
Monopoliyalardagi ijtimoiy xarajatlar tushunchasi, iqtisodchilarning muhim
hissalari e'tiborga olinib o'rganiladi.
Kalit so'zlar
:Monopoliya, Ijtimoiy Xarajatlar, Farovonlik Yo'qotish, Narx
Belgilovchi, Ijarachilik, Monopoliya Kuchlari, Mikroiqtisodiyot
Аннотация:
Эта статья изучает поведение и социальные издержки,
связанные с монополиями, с микроэкономической точки зрения,
подчеркивая влияние монополистических практик на общественное
благосостояние. Определяются основные характеристики монополий, что
создает
основу
для
изучения
соответствующей
литературы.
Рассматривается концепция социальных издержек в контексте
монополий, выделяя ключевые вклады экономистов.
Ключевые слова:
Монополия, Социальные издержки, Потеря
благосостояния, Установитель цены, Рента, Монопольная власть,
Микроэкономика
Introduction.
The main purpose of this microeconomic article is to deeply investigate
solid literature reviews on the topic of the behavior and the social costs of a
monopoly. Firstly, we think that it is important to define the main characteristics
of a monopoly shortly before finding literature reviews. Varian (2010) states
that a monopolistic firm is considered as the dominant supplier for a particular
SOLUTION OF SOCIAL PROBLEMS IN
MANAGEMENT AND ECONOMY
International scientific-online conference
108
good or service. Mankiw (2008) clearly explains the behavior of a monopoly:
Monopoly can change the market price and its output is regarded as the output
of the industry; thus determining its supply with accordance to the market
demand, all these exceptional features are sufficient enough for a monopolistic
company to become a price maker in the market. Barriers, license and patents
create stumbling blocks for other arising companies by decreasing their chances
to enter the market and therefore making a monopolist even more powerful.
Monopoly can be protected by government, trusted by consumers or the large
scale of production is the main reason why monopolies can stand for a long
period.
Initial points for the Social Costs of a Monopoly.
Many economists and scholars added their contribution to the development
of studying monopoly behavior and its costs to the society. The true social cost
of monopoly has always been an interesting topic amongst scholars in different
periods. As above mentioned character of a monopoly: the monopoly is a price
setter not a price taker (Competitive market). The firm that based on monopoly
tries to get maximum profit by equaling its marginal cost and marginal revenue
(MR=MC). If the monopoly restricts output and increases the prices, it will lead
to the social inefficiency, this situation is named as deadweight (welfare) loss in
economics (McConnel and Brue, 2009) (Figure 1 and 2).
Harberger (1954) has achieved to introduce methodologically the social
costs of a monopoly and he created a new economic term called “welfare loss”,
“deadweight loss” and Harberger’s triangle.
Figure 3. Harberger’s Triangle
SOLUTION OF SOCIAL PROBLEMS IN
MANAGEMENT AND ECONOMY
International scientific-online conference
109
Harberger (1954) claims that while competitive market price is less than
monopoly price, it can be a loss to society and consumers have to purchase its
goods with Qc – Qm. Therefore, the triangle (ABC) which is indicated in the
Figure 3 consists of the social cost of monopoly. PmABPc area shows the profit
of the monopoly from its buyers. The following statements are his main
assumptions:
“In the long run, resources can be allocated among our manufacturing
industries in such a way as to yield roughly constant returns.”
“All firms are operating on their long run cost curves, the cost curves are so
defined as to yield each firm an equal return on the invested capital, and
markets are cleared.”
“The elasticity of demand for the industry’s product is unity.”
Harberger (1954) concludes that “all I want to say here is that monopoly
does not seem to affect aggregate welfare very seriously through its effect on
resource allocation (Harberger, 1954).”
After Harberger’s conclusion which is considered to be significantly
impressive. Experts in this filed started becoming interested in both theoretical
and empirical sides of Harberger’s study. Additionally, he gave a vivid
explanation on monopoly and allocation of resources. Yet, Stigler (1956) states
that we can see several drawbacks on the assumptions of Harberger, because
the theory of elastic demand of unity seems to be more problematic. The reason
is that monopolists never want to do an operation without a noticeable amount
SOLUTION OF SOCIAL PROBLEMS IN
MANAGEMENT AND ECONOMY
International scientific-online conference
110
of revenue. Because of this, if we rely on Harberger’s research, the more demand
elasticity is the less the level of welfare will be (Stigler, 1956).
An essential theoretical contribution as a good example to the field has
been made by Tullock`s (1967) study after the Harberger`s. It is stated by
Tullock that monopoly causes much extended social costs than the triangle
suggested by Harberger. The consideration of the rectangle to the left of the
triangle suggested by Harberger, PmABCPc in figure 3, is its concise contribution
as per social cost additionally to triangle. It then creates a door for
argumentative questions such as should the endeavors of clients and possible
monopolists be considered socially wasteful. Thus, monopoly should
incorporate its social cost.
Siegfried and Tiemann (1974) made a decision to learn empirically the
social costs of monopoly by using the traditional way of Harberger (1954). Their
method is strictly rely on a partial equilibrium framework, after their deep
research, they finished the study with the following opinion: the result which is
obviously shown in the analysis reveals that only few monopoly industries
constitute a considerable welfare loss if the policy to decrease the monopoly
power is introduced. Their recommended policy could enable to decrease the
power of monopoly resulting a great benefit/cost ratio by restructuring the
manufacturing sector.
Posner (1975) is a good study example which contributed towards the
literature in which Tullock’s (1967) study was approved about the social cost
measurements of monopoly concluding welfare loss is not only Harberger’s
triangle but also the rectangular are on the left side of welfare loss triangle as
well. As an approval he claims that monopolies attract resources into efforts
while these resource could have efficiently been use in the competitive market,
so opportunity costs of the resources are paramount social costs of monopoly.
Posner (1975) divided monopolies into two distinct categories which are
regulated monopolies and private monopolies, where he considered the former
exceeds the latter category in social cost volume. When the author concluded he
criticized all previous researches that had been done up to his time accusing
them primarily on underestimating the true social costs of monopoly. In fact the
costs of acquiring monopoly to society is much greater than was expected
(Posner, 1975).
A few years later, the study literature of monopoly was enriched by
Wenders (1987). In his study he approves Tullock’s considerations about rent-
seeking activities performed by consumers in the aim of defending consumer
SOLUTION OF SOCIAL PROBLEMS IN
MANAGEMENT AND ECONOMY
International scientific-online conference
111
surplus. At the same time, however, monopolists or potential monopolists would
also perform such called rent seeking activities such as lobbying, giving bribery,
hiring lawyers and so on in order to capture consumer surplus while consumers
would perform parallel activities so as not to surrender to monopolists.
Wenders concludes that under perfectly competitive market between the buyer
and seller regulation leads to maximum welfare costs, which is equal to the cost
under full monopoly price decision and rent seeking costs. In fact, Posner’s
monopoly total welfare cost is obtained if seller succeeds in attaining full
monopoly pricing whereas welfare loss of Tullock’s is greater when rent-
defending activities are considered (Wenders, 1987).
One of the recent study in this sphere was done by Davis and Reilly (2000), they
apply the ways of experiments and analytics to estimate rent defending and rent
seeking behavior of monopoly. As a conclusion of different tests, they
acknowledge that
“overbidding is persistent when bidders have different sharing
rules.”
It is also claimed that whenever rent-defending activities comes with its
positive results, social costs of rent-seeking might continue to increase.
References:
1.
Davis, D. D. and Reilly, R. J. (2000). Multiple Buyers, Rent-Defending and
the Observed Social Cost of Monopoly, Pacific Economic Review, 5(3), 389-410.
2.
Harberger, A. C. (1954). Monopoly and Resource Allocation, American
Economic Review, 7(2) 77-87.
3.
Mankiw, N.G. (2008). Essentials of Economics, 6th ed. USA: South-Western,
Cengage Learning.
4.
Posner, R.A. (1975). The Social Costs of Monopoly and Regulation. The
Journal
of
Political
Economy,
83(4),
807-828.
Available
from
http://www.jstor.org/stable/1830401 [Accessed 26 October 2019].
5.
Siegfried, J. J. and Tiemann, T. K. (1974). The Welfare Cost of Monopoly: An
Inter-Industry Analysis, Economic Inquiry, 12, 190-202.
6.
Stigler, K. (1956). The Social Costs of Monopoly in an Open Economy,
Canadian Journal of Economics, 17(3), 718-730.
7.
Tullock, G. (1967). The Welfare Costs of Tariffs, Monopolies, and Theft,
Western Economic Journal 5, 224-232.
8.
Wenders, J. T. (1987). On Perfect Rent Dissipation, The American
Economic Review, 77(3), 456-459.
