Question

what are the welfare implications of monopolizing competitive market?

Answer 1

In perfect competition the economic welfare is the sum of producer surplus and consumer surplus while the producer gets it all under perfect price discrimination.So, a perfect competition results in allocative and productive efficiency.

When market structure changing from perfect competition to monopoly charging a single price, there is a deadweight loss or social cost of monopoly of the society. The resources are not used efficiently. Meanwhile, there is redistribution from consumers to the monopoly producer. Moreover, the monopoly leads productive inefficiency because of lack of pressure.

But on the other hand, monopoly has the incentive to innovation. It may benefit from the economies of scale. From these standpoints, monopoly is more efficient than we thought. If monopoly practices price discrimination, the economic welfare will increase up to the total surplus in the perfect competition. The price discrimination increases the efficiency of monopoly. The more perfectly the monopoly can price discriminate, the closer its output gets to the competitive output and the more efficient is the outcome.