Looking at the Cost Side of “Monopoly”

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Abstract
Welfare loss under oligopoly is defined as that part of consumer surplus which is lost and not regained by higher profits. In a model with asymmetric firms, this implies that the total welfare loss consists of the deadweight loss triangle plus a cost side inefficiency effect, due to the fact that in imperfect markets not all firms utilize the lowest cost technique. Using a flexible CV‐model we calculate these effects empirically for two relatively homogeneous industries (pulp/paper and cement). The deadweight loss triangles are shown to be smaller than the cost difference effect (“the staircase”) for these industries.

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