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7.6: Concluding Comments: Effects of Imperfect Competition on Economic Welfare

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    In imperfectly competitive markets like monopoly, oligopoly, and monopolistic competition, it is often the case that sellers can increase profits at the expense of consumers through their ability to control quantity or price. This is good for the seller but is bad for society as a whole. To conclude this chapter, it is worthwhile to spend some time on the welfare implications of imperfect competition. When markets are imperfectly competitive, the results are that (1) too little is produced; (2) too high of a price is charged for what is produced; and (3) there is a resulting dead-weight loss to the economy. In short, imperfect competition costs the economy in terms of a misallocation of resources. The combined value of economic activity measured as the sum of producers’ and consumers’ surplus would be higher if imperfectly competitive markets behaved competitively. Table \(\PageIndex{1}\) illustrates this point using the Cournot Nash equilibrium example above. Notice that total surplus in the market increases as the market becomes more competitive. Producers’ surplus declines but the gains in consumers’ surplus more than offset the decline in producers’ surplus.

    Table \(\PageIndex{1}\). Economic Welfare at Cournot Nash Equilibrium for Different Numbers of Firms*
    Number of Firms Producers’ Surplus (Profits) Consumers’ Surplus Total Surplus
    1 (monopoly) $4,050 $2,025 $6,075
    2 (oligopoly) $3,600 $3,600 $7,200
    5 (oligopoly) $2,250 $5,625 $7,875
    10 (oligopoly) $1,339 $6,694 $8,033
    Many (approaching perfect competition) $32 $8,068 $8,100

    *In Table \(\PageIndex{3}\), the market inverse demand curve is \(P = 200 - \Sigma Q_{i}\) and \(MC = 20\) for all firms.

    For the simple reason that total surplus increases with stronger competition, most governments have laws in place to encourage competition in markets. These are referred to as antitrust laws. Regulatory agencies evaluate mergers and acquisitions to determine whether they will adversely impact competition. A good example is provided by Hayenga and Wisner (2000). These authors describe antitrust issues that were evaluated in approving a merger between Cargill and Continental Grain, two entities with large grain merchandising businesses. Moreover, antitrust laws make it illegal to fix prices or form a cartel to limit quantity. A famous case of price fixing in agriculture involved lysine, an amino acid used in livestock and poultry feeds. ADM, a US company, conspired with Japanese and South Korean lysine manufacturers to keep the price of lysine above competitive levels. The conspirators faced criminal and civil penalties as a result of the price-fixing conspiracy. A very good overview of this case is presented by Connor (1997). In fact, there was even a movie made about this incident starring Matt Damon. See the trailer on youtube.com. The movie is titled The Informant and is based on a book by the same name. I am unable to recommend the movie one way or the other as I have not seen it, but it may be something you want to check out some weekend. If you do watch it, I will be interested to hear what you think. Both the Hayenga and Wisner (1997) and Connor (1997) articles are available through the University of Arkansas Libraries.


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