The Story of the Deadweight Loss and What Bathtubs and Swimming Pools Have to Do with Antitrust

Posted by Social Science Research Network

The Story of the Deadweight Loss and What Bathtubs and Swimming Pools Have to Do with Antitrust Adriaan Ten Kate Sr. (Independent)

Abstract: According to conventional wisdom, monopoly increases price and reduces output; it transfers money from consumers to producers, but consumers lose more than what producers gain; the difference is a welfare loss to society, known as deadweight loss. However, this is a partial-equilibrium story, applicable to a single product or industry; it does not account for spillovers to the rest of the economy. In a general-equilibrium setting with full employment of resources the effects of monopoly pricing are as follows. Nominal prices go up but real prices do not; output reductions in the industry are compensated by output increases in the other industries; transfers from consumers to producers depend on who the beneficiaries are of the monetary expansion necessary to keep resources fully employed and, finally, there is indeed a welfare loss, but only to the extent that monopoly pricing departs from average levels. If monopoly pricing is economy-wide and flat, there is no loss at all. It is not monopoly pricing by itself that causes the welfare loss; it is the disparity in monopoly pricing.