Consistent Comparisons Between Monopoly and Perfect Competition - Len M. Nichols with Susan Skeath, Ann Velenchik, and Karl Case

Posted by CHPRE Staff Publications Monday, June 1st, 1992

Introduction:

Exposition of the social welfare consequences of monopoly power is one of the central features of courses in intermediate microeconomics. This exposition is based on a purely illustrative comparison of monopoly outcomes with the outcomes of competitive market structures. At its best, this exercise provides an occasion to discuss both the specific costs of monopoly and the basic methodology of welfare comparisons. The main insight that students should take from the competition-monopoly welfare comparison is, simply, that monopolies tend to produce less output and charge more for it than would a benchmark perfectly competitive industry and that this type of equilibrium leads to a deadweight welfare loss. Unfortunately the contrived nature of this comparison gives rise to inconsistencies that may leave students feeling confused rather than informed. The purpose of this article is to identify the major inconsistencies in some standard treatments of the perfect competition-monopoly welfare comparison and to suggest more consistent and productive pedagogical approaches.

“Consistent Comparisons Between Monopoly and Perfect Competition,” (with Susan Skeath, Ann Velenchik, and Karl Case), Journal of Economic Education v. 23 #3 (Summer 1992).

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