Monopoly and Economic Efficiency: Perspective from an Efficiency Wage Model

Bo Zhao

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DOI: 10.4236/me.2011.25092                

Abstract

The objective of this paper is to analyze the efficiency consequences of monopoly from the perspective of an efficiency-wage model based on Shapiro and Stiglitz (1984). An important innovation of our model is that a firm can raise the probability that a shirking worker is detected by increasing its effort or investment in the monitoring of workers. By comparing with the competitive equilibrium we find that monopoly is associated with higher unemployment rate and less monitoring. Surprisingly, however, monopoly is not necessarily dominated by perfect competition in terms of economic efficiency.

Keywords

Monopoly, Economic Efficiency, Unemployment, Efficiency Wage

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	C. Shapiro and J. Stiglitz, “Equilibrium Unemployment as a Worker Discipline Device,” American Economic Review, Vol. 74, No.3, 1984, pp. 433-444.