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.

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Keywords efficiency losses, monopoly, principal-agent problem
Persistent URL dx.doi.org/10.1007/s11459-011-0139-z
Journal Frontiers of Economics in China: selected publications from Chinese universities
Citation
Chen, J. (Jun), & Chen, Z. (2011). The quiet life of a monopolist: The efficiency losses of monopoly reconsidered. Frontiers of Economics in China: selected publications from Chinese universities, 6(3), 389–412. doi:10.1007/s11459-011-0139-z