chapter  12
Welfare Losses and Resource Misallocation
Pages 22

This chapter is concerned with the magnitude of the welfare losses resulting from the existence of monopoly power. Traditional welfare economics tells us that perfect competition is one way of achieving an efficient allocation of resources, but the preceding chapters have shown us how far away a modern industrialised economy is from even approximating to the perfectly competitive paradigm. Instead of a large number of firms in each market, each taking price as given and earning only normal profits, we have found many markets dominated by a small number of large firms with some degree of market power. The existence of market power means both that firms have some measure of control over the price that they set and also that firms will compete by methods unheard of in a perfectly competitive model: by product differentiation, by advertising, by innovation, for instance.