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Frontiers of Economics in China

Front Econ Chin    2011, Vol. 6 Issue (3) : 389-412     DOI: 10.1007/s11459-011-0139-z
research-article |
The Quiet Life of a Monopolist: The Efficiency Losses of Monopoly Reconsidered
Jun Chen1(), Zhiqi Chen2()
1. Department of Human Resources and Skills Development, Government of Canada, Ottawa K1A 0J9, Canada; 2. Department of Economics, Carleton University, Ottawa K1S 5B6, Canada
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Abstract

We study the efficiency losses of monopoly in a model where the firm’s total cost of production decreases with the manager’s effort to control cost. In contrast to the existing analyses of oligopolistic and monopolistically competitive markets that find an ambiguous relationship between competition intensity and managerial slack, we demonstrate that, under the same kind of cost condition, monopoly unambiguously reduces effort level and, in the case where ownership and control are separate, magnifies the effects of the moral hazard problem. Furthermore, under an alternative cost condition monopoly raises effort level rather than reducing it. In such a situation the separation of ownership and control may mitigate the productive inefficiency of monopoly.

Keywords monopoly      efficiency losses      principal-agent problem     
Corresponding Authors: Jun Chen,Email:jun.chen@hrsdc-rhdcc.gc.ca; Zhiqi Chen,Email:z_chen@carleton.ca   
Issue Date: 05 September 2011
 Cite this article:   
Jun Chen,Zhiqi Chen. The Quiet Life of a Monopolist: The Efficiency Losses of Monopoly Reconsidered[J]. Front Econ Chin, 2011, 6(3): 389-412.
 URL:  
http://journal.hep.com.cn/fec/EN/10.1007/s11459-011-0139-z
http://journal.hep.com.cn/fec/EN/Y2011/V6/I3/389
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